Tuesday, August 19, 2008
Muni Bond Insurance-RIP
"Bond insurer Ambac Financial Group Inc. paid $850 million to Citigroup Inc. to terminate a guaranty contract tied to $1.4 billion in troubled mortgage-related securities. The move sent shares of Ambac and other bond insurers higher, as investors anticipated more cancellations of similar contracts, which could help the insurers clear out some of their losing positions. ... While the terminations of CDO guarantees appears to be positive for many bond insurers, it could spark a rush by financial institutions to get as much capital as they can from the insurers. If the insurers make significant payouts now 'there could be less protection left for the rest of their policyholders,' which include investors that hold municipal bond guarantees, said Rob Haines, an analyst at Credit-Sights", Lavonne Kuykedall and Serena Ng at the WSJ, 2 August 2008.
I think Eric Dinallo, NY State Insurance Commisioner should prohibit this. It looks like a "preferential payment" prior to bankruptcy to me. I agree with Haines, these kind of payouts are bad news for muni bond holders. Muni bond issuers should be screaming over this.