Municipalities May Suffer Subprime Fallout

Yves Smith of Naked Capitalism submits:

Gillian Tett, in "Credit compass fails to work," in the Financial Times (subscription required), uses the woes suffered by monoline insurers such as MBIA and Ambac to illustrate that in our current credit crunch, nobody is sure where the dead bodies lie, which makes everyone suspect.

Monoline insurers provide credit guarantees for securities. They have come under scrutiny recently because their products were one of several means used by underwriters of collateralized debt obligations to enhance the credit quality of the vehicle.

Oddly, Tett does not mention that the monoline insurers' biggest business is guaranteeing municipal bonds. Thus, if they lose their AAA ratings due to subprime-related damage, it would make it more difficult and costly for municipalities to raise money. The subprime mess continues to reach into unexpected quarters.

However, the monoline insurers may be under a false cloud. They claim to have a mere, manageable 6% of their book exposed to subprime. And people I know who are close to Ambac tell me that the company was aggrieved to have lost market share in real estate securitization to more creative players. Unfortunately, they are now learning that their relatively conservative posture may not have been conservative enough.