<p class="MsoNormal">Muni Insurance Worthless as Borrowers Shun Ambac (Update2)</p>
<p class="MsoNormal"><a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=aUinEIdJ4QBo">http://www.bloomberg.com/apps/news?pid=20601087&sid=aUinEIdJ4QBo</a></p>
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<p>Dec. 21 (Bloomberg) -- State and local borrowers are discovering that buying municipal bond insurance from MBIA Inc. and Ambac Financial Group Inc. is a waste of money. </p>
<p class="MsoNormal">…</p>
<p>Wisconsin, California, New York City and about 300 other municipal issuers sold bonds without buying insurance in recent weeks, avoiding premiums that are as high as half a percentage point of the bond issue, according to data compiled by Bloomberg. The amount of insured bonds sold fell about 15 percent in November from a year earlier, according to Thomson Financial figures cited in the Bond Buyer, an industry trade publication. </p>
<p>Municipal issuers paid an annual average of $1.99 billion in premiums over the past five years to gain the AAA ratings granted by insurers on $1.86 trillion of interest and principal payments, Standard & Poor's says. </p>
<p>States and local governments with investment-grade ratings default on less than 1 percent of their debt because they can raise taxes and fees, according to a March report by Moody's Investors Service. They may be better credit risks than their ratings indicate. </p>
<p>…</p>
<p>Many investment-grade munis would have AAA ratings without insurance if they were ranked the same way as corporate debt. Every state except Louisiana would be Aaa, based on the scale for companies, which ranks borrowers on the probability of default, according to the report by Moody's. </p>
<p>Municipal issuers are ranked on their fiscal health relative to other municipalities. Investors' increased willingness to buy state and local government debt without guarantees suggests that borrowers may not require the backing of insurance companies. </p>
<p>``We have already begun to notice investors getting more comfortable with the primary payer and a willingness to forgo insurance for AA tax-backed credits,'' Bear Stearns said in its Dec. 13 report. </p>
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<p class="MsoNormal">Older article on credit ratings linked below</p>
<p class="MsoNormal"> <a href="http://nakedshorts.typepad.com/nakedshorts/files/EinhornOnCredit.pdf">http://nakedshorts.typepad.com/nakedshorts/files/EinhornOnCredit.pdf</a></p>
<p class="MsoNormal"> “Consider municipal bonds. According to S&P’s long-term data the 10 year default rate on an A rated municipal bond is 1%; while a corporate bond’s default rate is 1.8%; and a CDO’s is 2.7%. An A rated muni has the same chance of default as a AA/AA- rated corporate and a AA+ rated CDO. When municipal bonds default the expected recovery rate is 90% compared to 50% on corporate and CDOs.”</p>
