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March 14, 2008

Insurance Drops for Municipal Debt, Undermines MBIA

Demand for municipal bond insurance is shrinking at the fastest pace in the industry's 36-year history.

The backing of an insurer has become a liability for tax- exempt borrowers, sometimes doubling interest rates instead of lowering them. State and local governments bought protection on 26 percent of the $40.8 billion in bonds they sold in January and February, down from 53 percent a year earlier, according to data compiled by Bloomberg. At that rate, 2008 will mark the steepest-ever annual decrease, wiping out almost two decades of growth, Thomson Financial data show.

An extended decline would undermine the two biggest bond insurers, MBIA Inc. and Ambac Financial Group Inc., because they're counting on municipal sales to shore up credit ratings threatened by losses on mortgage-backed debt. Treasurers from California, Pennsylvania and Mississippi told lawmakers yesterday many borrowers would never have relied on insurers' ratings if their own were assessed like corporate debtors.

``This is a watershed moment in the municipal bond industry,'' said Richard Larkin, research director at brokerage Herbert J. Sims & Co. in Iselin, New Jersey, and the former chief municipal rating officer at Standard & Poor's. ``The bond insurers have lost a tremendous amount of credibility.''

Municipalities from California to New York are rejecting insurance as fallout from the collapse of the subprime mortgage market strips some of the biggest guarantors of their top AAA ratings. Even the safest debt that they back is tainted.

AAA Ratings

California, which spent $102 million to insure $9.1 billion of bonds between 2003 and 2007, decided insurance wasn't worth it on its most recent $5.95 billion of debt sales, said Treasurer Bill Lockyer.

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Posted by healthinsurance at March 14, 2008 04:17 PM