Bond Insurer Losses Could Have Broader Impact
SCOTT SIMON, host:
Yet another part of the financial industry has become ensnared in the subprime mortgage crisis. Bond insurers such as MBIA and Ambac Financial Group built up their businesses by insuring low-risk municipal bonds, but during the nation's housing boom, these and other bond insurers invested heavily in subprime and other mortgage-backed investments, and now they're paying the price.
Joe Nocera joins us, our friend from the world of business, who's a columnist for the New York Times.
Joe, thanks for being with us.
Mr. JOE NOCERA (Columnist, New York Times): Thanks for having me, Scott, and did you ever think you would do a segment on bond insurers?
SIMON: I always hoped to aspire to it, as a matter of fact.
Mr. NOCERA: But surprisingly, this is pretty important stuff.
SIMON: Of course it is.
Mr. NOCERA: This is a classic example of an industry that did something safe and solid and went and decided, well, we don't want to be stodgy players. We want our stock to raise up. We want to make a lot of money. So they went into these really risky forms of insurance, and now as those sub-prime mortgage bonds have been down-graded and started to blow up, the bond insurers are starting to blow up, too, and the real significance is: What does it mean not just for municipalities all over the country but for the entire market?
SIMON: Of course I said in introducing you: Now they're paying the price. But in fact, we might be paying the price, right?
Mr. NOCERA: Absolutely, on two levels. Municipalities, potentially at least, could wind up paying more in interest for bonds if the insurers went away, although that's probably not going to happen because you've seen Warren Buffet and some other people step up and say hey, we'll take that nice, slow business. So there's not that much possibility of that happening.
What's really more likely to happen is that if these bond insurers get down-graded by the rating agencies from their triple-A rating, that would cause all the holders of the bonds to also have down-grades, which would mean yet more billions of write-offs, yet more losses, yet more problems for the stock market and yet more ripple effect on the rest of the economy. So the consequences are actually quite enormous.
SIMON: Thursday of this week, New York Governor Spitzer warned bond insurers -he gave them three to five days to raise the money to cover their losses.
(Soundbite of laughter)
Mr. NOCERA: Yeah, three to five days. Thanks, pal. What's been happening over the last month is that the bond insurers have been in this constant need to raise capital, and the rating agencies - I'm talking about Moody's and Standard & Poor's and Fitch - have basically said if you raise the capital, you'll get to keep your triple A.
And it's been a real struggle because as they raise more capital, there's more deterioration in the marketplace, there are more potential losses, they have to raise more capital, and the banks themselves don't really want to give the bond insurers a bailout, or they don't want to coalesce to do that, which is basically saying look, I'm out of patience here. New York State is out of patience here, and if you don't do something fast, we'll do it for you.
And what he's threatening to do, really the implicit threat, is that they would split the companies into two so that the safe portion, the municipal bond portion, would be one company, and the troubled portion would be another company, and of course the minute that happens, those troubled companies are basically doomed because it's the municipal bond part of the thing that's holding the whole apparatus up.
SIMON: What do you look for next, Joe, the next couple of weeks?
Mr. NOCERA: Well, I think there will be continued pressure by New York State and by Spitzer. I think that there will be a concerted effort to create some kind of bailout, and what's really going to happen over the next two, three weeks, next months is: Will this play out in a way that separates municipal bonds from the troubled part of the company, or will the market figure out a way to try and save these companies as entire entities? And that's what you should watch for.
SIMON: Joe Nocera, business columnist for the New York Times. Thanks very much.
Mr. NOCERA: Thanks for having me, Scott.