One of the most common criticisms of the financial media unleashed during the Not So Great Depression was “you didn’t warn us about [insert little known company, acronym, structured product or dubious form of home loan, here]“.
But in the case of the bond insurers, sometimes but not entirely accurately called monolines, that criticism would be more than a little unjust.
In late 2007, when shares in sector heavyweights MBIA and Ambac were trading near their all-time highs, the FT ran a series of articles in the following vein:
The crisis in US subprime mortgage-related bonds and its spillover into broader structured credit markets has had a huge impact on one important but little-known group of companies: the bond insurers [Link]
…
Investor worries are mounting that the next big casualties from the credit squeeze might be the specialist companies that act as guarantors for bond issuers. [Link]
…
Specialist bond insurance companies such as MBIA and Ambac face a moment of reckoning in the coming weeks…the bond insurers’ quest for new capital to secure their triple-A status could face significant challenges amid limited investor appetite for companies with exposure to structured securities backed by mortgage debt. [Link]
The responses from investors, analysts, rating agencies and the companies themselves were, respectively, unconvinced, mixed, non-committal and absolutely outraged.
One press officer at an unnamed insurer deplored the “irresponsible” and “baseless” coverage; another suggested the reporters involved were “in league with the shorts” – a reference, undoubtedly, to one William A. Ackman, an unabashed critic of these companies.
The rating agencies, meanwhile, were moving to reassure a jittery market that everything was AAA-OK. In February 2008, both Moody’s and Standard & Poor’s affirmed MBIA’s gilded rating – and this even after the then-market leader had disclosed its exposure to $8.1bn in CDO^2 and forced to settle charges of securities fraud. (Fitch was less impressed.)
But it’s been all downhill since then, and on Wednesday, S&P declared the outlook for the bond insurance industry was “uncertain”, and pointed out that only one active bond insurer remained – Assured Guaranty.
From S&P:
“Taking into account the recent market stress, the decline of the large well-established insurers, the potential for new entrants, and possible alternatives to bond insurance in the municipal market, we believe the prospects for a revival of this industry are modest,” said Standard & Poor’s credit analyst Rodney Clark.
…
In other words, this year will be telling for the future of bond insurance. If one or two strong and highly rated new insurers launch in 2010, and if they successfully penetrate the market, then it is likely that the sector will thrive in the next few years. But we believe the window of opportunity is small. Declining tax revenues and growing pension and other benefit obligations are weighing heavily on state and municipal credit. These developments increase the value of insurance. At the same time, however, they increase the risk to insurers.
Ultimately, S&P didn’t quite reach a conclusion, ending on the following rather wishy-washy note:
So the “new normal” for bond insurance remains unclear. But what is clear is that the future of the sector will be in striking contrast to the past–with new names, new business models, and a redefined scope–as bond insurers attempt to rebuild based on lessons learned from the recent crisis.
Here on FT Alphaville, we’re much more cynical. Bond insurers, at least as we’ve come to know and completely mistrust ‘em, RIP.
Related links:
It paid not to have a dodgy haircut – Gillian Tett / FT
MBIA to Call on Congress to Rein in Ackman – DealBook
S&P calls the death of the SIV – FT Alphaville