Here in the depths of the biggest crisis the municipal bond market has known since the Great Depression, it’s business as usual.
Will the credit crunch devour the bond insurers? It’s possible. To hear certain analysts, it may even be likely. The municipal market doesn’t care.
Help me with this one. At a time when nobody really knows if the nation’s major bond insurers will still be rated AAA in a couple of months, municipalities are lining up to get their bonds insured. Investors, evidently, are buying them.
In the second week of November, more than half of the issuers who sold bonds got their deals insured. This is exactly the proportion of bonds that are normally insured during a given year, at least recently.
But this isn’t a normal year, as the prices of the stocks of the top two bond insurers, Ambac Financial Group Inc. and MBIA Inc., amply demonstrate. The crisis erupted this fall, after the insurers revealed that they had insured collateralized debt obligations that contained subprime mortgages.
The rating companies now say that the insurers might have to raise more capital to protect their all-important AAA ratings. If they can’t, they may lose those ratings.
Let’s be clear about this: Nobody knows what’s going to happen with the insurers. They are staring into the abyss. And yet the market is complacent.
Of the 146 deals that were sold through exclusive negotiation with underwriters last week, 85 were insured, or 58 percent. Of the 101 deals sold at auction, 48 were insured, or 47.5 percent.
During the same week last year, 56 percent of sales in both markets were insured.
The market is saying nothing much has changed.
And while Financial Security Assurance Holdings Ltd., or FSA, picked up some business over its competitors because it is the least-embroiled in the subprime mess, it’s not as if people have stopped doing business with Ambac, MBIA or FGIC Corp. The whole alphabet soup of insurers was represented in the week’s business.
One melodramatic question and answer comes to mind: Can such things be? Such things, my friend, are.
This defies belief.
Warren Buffett to the rescue! On Nov. 13, the Wall Street Journal carried a story saying that the bond insurers had gone to visit Omaha, Neb., hat in hand, and that Buffett appeared to be interested, or at least receptive. At least there were no reports that he showed them the door.
As far as I can tell, this is what the municipal market is pinning its hopes on – that Buffett and Berkshire Hathaway Inc. will invest in the bond insurance business, or perhaps even go into it himself.
And you know what? He should. It took decades (the first bond insurance policy was written in 1971), but investors and municipalities, and their underwriters, are absolutely addicted to the stuff. How else to explain the inexplicable? It’s almost as if they can’t go to market without insurance.
This is very much a Buffett business. Insure nothing other than municipal bonds, and watch the money roll in.
This hasn’t exactly been an easy period for the municipal market. The week before Thanksgiving is typically a very busy one. A number of issuers postponed auction sales, while in the negotiated market, something like $7 billion in transactions have been delayed. The unsettled conditions in the market are being blamed on the crisis facing the bond insurers –and yet the insurers are all still out there writing business.
An especially interesting phenomenon is occurring in the secondary market right now. Last year at this time, seven blocks of bonds that hadn’t been insured at all when they were first sold, were insured in the secondary market, by MBIA, according to Bloomberg data. Getting bonds insured in the secondary doesn’t happen a lot, but it’s not unheard of.
Especially now. As of Nov. 19, 64 blocks of bonds had been insured in the secondary market, only now it looks like some investors are getting their already-insured bonds insured by someone else, just to make absolutely sure they stay AAA.
MBIA insured three blocks of bonds insured by FGIC; the bulk of the business, however, was done by FSA, which has insured more than 50 blocks of bonds already guaranteed by Ambac and FGIC.
That’s not business as usual. You can bet there will be more secondary market transactions like that. •
Joe Mysak is a Bloomberg News
columnist.
