Bond Insurers Facing Litigation
Many clients of the bond insurance industry had interest payments skyrocket earlier this year when the auction rate securities market failed. When many of the bigger names in the industry like Ambac and MBIA lost their top credit ratings, their clients paid the price when demand for bonds that lost their AAA status evaporated.
For years municipalities have been forced to purchase bond insurance due to the dual credit rating system between them and corporate entities. Despite municipal bonds having a stellar history of low default rates, very few communities earned AAA status so it was just cheaper to purchase bond insurance and get lower borrowing costs.
Most communities were for the most part content with this arrangement until insurers started insuring high risk residential mortgages bundled into Collateralized Debt Obligations(CDOs) and put AAA rated municipal bonds in jeopardy as well. State and local governments had to pay hundreds of millions in higher interest costs and now many of them are filing lawsuits against the insurers as well as the investment banks that normally purchase bond issues if an auction is in danger of failing.
Lately there has been a strong push from many different sides to abolish the dual rating system and things seem to be moving in that direction. Ratings agencies are also facing their own intense scrutiny for rating these high risk CDOs as investment grade in the first place.
Let’s face it a lot of companies are going to get sued over this whole fiasco. When your interest rates shoot over 20% through no fault of your own, you’re taking somebody to court.
