Friday, February 22, 2008

More on the Bond Insurer Mess

Nicole Galinas of the New York Post elaborates the point about the dual role of borrower and regulator that the State of New York represents. She rightly notes that NY State would benefit from the separation of the mortgage and muni insurance business. I pointed out yesterday that Spitzer’s biggest concern was maintaining NY State’s borrowing capacity.

But I find it hard to believe that municipal borrowers were really paying 20%. I would not be surprised if some of the bonds declined in value to the point where the offered yield was 20% - but I cannot imagine any government borrower seriously willing to float paper at this rate. Maybe the indentures carried variable rates? If so, this can only be described as asinine, since rates have been quite modest over the past seven years. In any event if otherwise solid municipalities are paying penalty rates, they can refinance (albeit, without insurance and with new investment banking fees).

The bottom line is that this entire effort to rewrite the rules of underwriting AFTER the contract goes into force is unethical. Worse, it is not even a positive development, since it will ultimately reduce access to credit in the real estate markets (by making investors less willing to finance MBS-insurance firms, knowing that the rules can be tweaked at any time by populist politicians). And, since municipal finance in the United States is primarily driven by real estate taxes, NY State is only serving to reduce its future income streams.

UPDATE: I miss wrote earlier - the Port Authority of NY and NJ paid 20% annualized rates to rollover an existing issue. HOWEVER, they will only pay this for one week. Apparently, the proximate cause was a failure of the major market participants, who chose not to participate. Usually, these firms make significant buys because of their ability to resell the bonds to their clients. For whatever reasons, they let this auction fail - which naturally spooks the rest of the market. The attractive rates for a financially strong institution like the Port Authority will undoubtedly bring in a host of smaller firms to buy up the next issuance of paper. Presumably rates will be much lower.

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