The Great Crunch may soon be coming to a worthy neighbourhood project near you.
As one David Angluin, of Liverpool, pointed out in a letter to the FT on Tuesday, one of the great positive effects of the growth of the monoline insurers has been that they allowed for the commoditisation of many thousands of idiosyncratic - but socially important - municipal debts. In a world before bond insurance wrappers, how would an ordinary bond insurer have tackled:
a Healdsburg, California, 5.25 per cent maturing on December 1 2025 funded by a Sotoyome Community Development Agency tax allocation with a sinker of December 1 2020?
At a stroke insurance from the likes of MBIA, Ambac and all the other specialist firms now in trouble turned so many unique (and therefore difficult to value) investments into something coherent that could be considered on standardised measures like coupon, yield, maturity, and so on. A large, liquid market was born that enabled real public investment at lower cost.
But that was before the monolines diversified into CDOs. Now the lack of available insurance for regular, reliable municipal borrowers is feeding through directly into higher financing costs.
From Bloomberg (via Financial Armageddon):
Bond insurance sold by MBIA Inc., Ambac Financial Group Inc. and Security Capital Assurance Ltd. is backfiring on counties, universities and hospitals across the U.S., more than doubling some borrowing costs.
Park Nicollet Health Services in Minneapolis may pay an extra $5 million to $6 million this year, about a quarter of its operating profit, because interest on $375 million in floating- rate debt doubled in the last six weeks, said Chief Financial Officer David Cooke. The rate on $98 million insured by Ambac climbed to 6 percent on Jan. 30 from 3.06 percent on Jan. 2.
“We’ll have to reduce our capital expenditure program, which means less equipment, less modernization of facilities,” Cooke said in an interview. The hospital paid Ambac to “count on that AAA insurance for 30 years. Now it’s going away on us.”
