Losses For Bond Insurers Keep growing
The bond insurance industry has been reeling for over a year now and in the third quarter, losses have continued to pile up. Their troubles have created instability in bond markets as declining ratings impact the underlying securities they insure.
During the credit and real estate boom earlier this decade, these bond insurers sold derivative-based guarantees on mortgage-backed securities and other more complex housing-related securities known as collateralized debt obligations, or CDOs.
Now that house prices have slumped and foreclosures surged, Ambac and MBIA have to pay up on some of those guarantees, while recording permanent impairments on the others.
They’ve also lost their crucial AAA ratings, making it more difficult to sell new guarantees. Further rating agency cuts could put even more stress on these companies.
With the financial crisis coming to a head last month, it is now even more difficult to find credit these days. Further liquidity problems could force the industry to turn to the government for help.
The growing troubles in the insurance industry in general will increase pressure on Congress to implement a National Insurance Commission. The days of a hands off approach to financial services are over and in the coming years we likely see an increase to federal regulations across the board.
Now obviously these companies would prefer to survive without the government’s help and the longer the credit crunch lasts the worst off they will become. The two largest bond insurers, Ambac and MBIA appear to have enough reserves to survive the next quarter at least but they are quickly running out of options.
Their significant exposure to toxic debt makes it so that their fortunes are inexorably tied to the housing market and things continue to look bleak in those circles. Yeah it’s possible they can survive without intervention but that doesn’t help bond markets or their clients for that matter.
The investors and municipalities who are paying the price for all this won’t see relief until these companies raise their credit ratings once again and that’s probably not possible short of a housing recovery or the more likely scenario, re-capitalization through government means.



Now that the banking system is getting relief from the federal government, there are also a few companies in the insurance industry that want to access that large pool of capital. The CEO of Ace Limited however has criticized his fellow counterparts saying it’s
With the financial system crumbling, it seems as if ratings agencies can’t cut credit ratings fast enough. Facing intense scrutiny from regulators because of their part in the build up and subsequent collapse of the subprime market, ratings agencies aren’t holding back when it comes to ratings downgrades.