Municipal Bond Forum
On Don’t Lose Sleep Over Bond Insurers Woes cont’d #2:
Q
Your article did little to put my mind at ease. First, you repeatedly referenced AAA-rated bonds, but what about lesser grades, although higher than BBB? Seems you’re hedging your comments. And my understanding is that some of these bonds only get the AAA rating because of the insurance, so the underlying rating is less than that. Second, you say MBIA reports that it incurred losses on only 102 transactions of 93,211 issues in its 30-year history. That’s about one loss in every 900 issues. Seems relative high to me, given that the entry rating to get insurance is – as you say – an investment grade BBB. Third, in the last 30 years (or longer) we have never been in a financial climate like we are now. You are obligated to try and ease the concerns of your investors, but you are in an unenviable position of having a serious conflict of interest in trying to persuade us that all is well. I can’t sleep any better based on what you are telling us.
A
James A. Klotz responds:
We did not intend to hedge our comments regarding bond insurers and the high degree of safety provided by municipal bonds, insured or not. We should have made it clear that we were addressing a specific customer inquiry regarding the potential impact of a downgrade by Fitch of one of the AAA insurers.
Our point is, the vast majority of insured issues are adequately secured on their own merit, and the fact they are insured provides an additional level of credit enhancement, which rarely comes into play.
I agree that we are experiencing an unusual financial climate, but hardly find it to be the dire situation described daily by sensationalist financial journalists.
The stock market, although down recently, is still hovering in the 13,000 area. Long-term interest rates are very low and employment statistics continue to be excellent. The current “crisis,” although serious, is pretty much confined to the housing and mortgage market, which was badly in need of a correction.
I don’t find myself to be in an unenviable position, as you describe, since I sincerely believe in the security provided by municipal bonds, which comprise the majority of my personal net worth.
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