Effect On Municipal Bonds and Bond Insurers
A secondary cause and effect of the crisis relates to the role of municipal bond "monoline" insurance corporations such as Ambac and MBIA. By insuring municipal bond issues, those bonds achieve higher debt ratings. However, some of these companies also insured CDOs backed by low-rated tranches of subprime mortgage-backed securities, and as default rates on those MBS have risen, the insurers have suffered significant losses. As a result, rating agencies have downgraded several bond insurers—as well as the bonds they insure--some to low speculative grade rating categories.
The downgrades further threaten the bond insurers because they become unable to underwrite new business going forward. The downgrades may also require financial institutions holding the bonds to lower their value or to sell them, as some entities (such as pension funds) are only allowed to hold the highest-grade bonds. The effect of such a devaluation on institutional investors and corporations holding the bonds (including major banks) has been estimated as high as $200 billion. Regulators are taking action to encourage banks to lend the required capital to certain monoline insurers, to avoid such an impact. However, rather than recapitalizing insurance units plagued by exposure to subprime related products, some insurers are focused on moving excess capital to previously dormant units that could continue to underwrite new business.
Read more about this topic: Indirect Economic Effects Of The Subprime Mortgage Crisis
Famous quotes containing the words effect on, effect, municipal, bonds and/or bond:
“The pleasure of one’s effect on other people still exists in age—what’s called making a hit. But the hit is much rarer and made of different stuff.”
—Enid Bagnold (1889–1981)
“The cities of the world are concentric, isomorphic, synchronic. Only one exists and you are always in the same one. It’s the effect of their permanent revolution, their intense circulation, their instantaneous magnetism.”
—Jean Baudrillard (b. 1929)
“No sane local official who has hung up an empty stocking over the municipal fireplace, is going to shoot Santa Claus just before a hard Christmas.”
—Alfred E. Smith (1873–1944)
“It’s rather grisly, isnt it, how soon a living man becomes nothing more than a collection of stocks and bonds and debts and real estate?”
—John Dos Passos (1896–1970)
“Every doctor will allow a colleague to decimate a whole countryside sooner than violate the bond of professional etiquet by giving him away.”
—George Bernard Shaw (1856–1950)