Our saga of consumer debt difficulty continues to metastasize and generate tumors in far flung economic organs. Today (December 19, 2007) it became clear that cities and towns will be facing less available credit and paying more for the credit they get. This is important because it means that Americans will be faced with a slowing economy and cash-strapped local service providers. As the economy slows, more folks need more help from local social programs.
Inevitably, rising demands for help will collide with falling local budgets. American municipalities have been cutting taxes for some time, and they have survived by reaping increased revenue from rising property values and taxing housing activity. When this revenue left their budget short, they sold future tax returns to investors seeking insured bonds with tax advantages. In other words, they sold insured municipal bonds.
These municipal bonds are "safe" because they are insured by specialized firms -- monoline insurers. All at once, housing is in trouble, property values are falling and municipal bond insurers are not looking good. This is not a minor technical or financial matter that you can easily ignore. About half of all US municipal bonds are ensured by 4 companies: Ambac, FSA, MBIA and FGIC. As of November 2007, these firms covered $2 trillion in bonds. These bonds and their insurance are essential parts of the operation of American localities.
From 2001-2006, monolines (The four large Muni bond insurers- authors note) have insured more than $1 trillion of U.S. municipal bonds to fund schools, highways, airports, transit
systems, hospitals, environmental systems and other projects. November 2007 AFGI Overview (pdf)
Municipal bond insurance assures investors that the debt issued by cities and towns will be repaid, principle and interest. Thus, it removes risk and allows investors to confidently allocate capital to municipalities. On the other side of the market, insurance allows city and town much greater access to funds at lower cost. Issuers must be regularly rated by state insurance agencies and credit ratings agencies. New York and California State Insurance face regulation and in-depth scrutiny from Moody, Standard & Poor and Fitch, which allows the highest ratings to be awarded to many bonds.
So, insurers regulate the quality of the municipal bonds and offer insurance to the cities and town that issue them. Meanwhile, credit ratings agencies regulate the insurers to assure that they have the highest rating, AAA. This rating requires that issuers meet minimum standards of management, risk control, capital and strength in the face of prolonged economic downturn. Across the past several months ratings agencies have downgraded and warned about the economic health of bond insurers. When bond insurers face questionable health, the bonds they insure are called into question. This means tens of thousands of municipal bonds may be downgraded and lose value. For example, on December 19, 2007 S&P downgraded the small insurer ACA. This immediately raised suspicions regarding the four leading industry players.
Municipal bond issuance is vital to the ability of American cities and towns to improve roads, invest in schools, provide affordable housing and invest in infrastructure. These bonds also allow cities and towns to fund mismatches between tax revenues and community spending needs. Affordable bond insurance saves towns and cities money and allows them access to more credit at lower cost.
Bond insurance is cost effective for an issuer as long as the interest cost savings exceed the premium paid to the insurer. Since the inception of municipal bond insurance in 1971, municipalities have saved more than $37 billion in borrowing costs through bond insurance, saving about $2 billion annually for the past decade. AFGI (Association of Financial Guaranty Insurers [pdf])
What is going on? Why the trouble now?
The four dominant firms in this business, Ambac, FSA, MBIA and FGIC, have been increasingly active in insuring US home mortgage bonds and pools of home mortgage bonds. As of January 01, 2007, the four leading firms insured approximately $570 billion in structured financial product -- largely home mortgage bonds, pools of home mortgage bonds. Included in the structured product is $249 billion in mortgage and home-related debt and debt product. The firms that insure municipal bonds have rapidly and profitably grown their business divisions related to insuring the payments and value of debt instruments made up of home mortgage payments. This includes sub-prime home mortgages. The insurers have underwritten insurance on the principle and interest payments of American home purchasers and refinancers. These payments have been defaulting at elevated rates as house prices fall.
By now you should have guessed where this was going. The size of the commitments to insure against defaults on bonds and other securities comprised of home mortgages is very large. Since we had not seen sustained declines in national home prices since the Great Depression, insurers and ratings agencies accumulated huge default risk against home mortgage-backed bonds and financial vehicles. As losses mount, there is increasing pressure and suspicion regarding the ability of some insurers to stay healthy and highly rated. As defaults mount, insurers risk being forced to pay out on the insurance they sold. This may put a long term and very expensive strain on these firms. These strains may result in downgrades in the credit quality assigned to these insurers. This creates systematic risk to the credit ratings of the municipal bonds they insure.
Strains on insurers are likely to pass on to municipalities looking to secure funds. The turmoil in mortgage markets is bleeding over into municipal bond markets through stressed insurers. This will likely occur alongside stresses to local budgets from changes associated with a national housing downturn. Claims for services will rise. We expect falling tax revenues whenever we have an economic downturn at the end of consumption driven boom. Rising home value assessment will become falling home value assessment. Revenue from home sales will slump. More households will be late or delinquent in making tax payments. These stresses will motivate localities to raise cash by selling municipal bonds. When they attempt to enter this market, they are likely to confront increased difficulty in getting insurance, increased costs for insurance and higher required interest payments from investors.
This is what a broad structural credit crisis means. It means metastasis. Disease in one vital economic organ -- housing -- spreads to other vital economic organs -- local finance......
The interest rates being charged for all kinds of consumer debt are... usury.
The "fees and penalties" charged by banks are... cheating, and fraud.
Let me offer a shocking suggestion to the banking industry: start considering that all those millions of people you've tried so very hard to scro-o-o-ooo are your customers. They really would rather not walk away from your loans; they'd rather repay them as-agreed. But they must be offered terms that are actually fair. They are entitled to honest accounting. "You win, only when they win."
You are, in other words, businessmen. With customers. The guv'mint isn't going to hand you a "get out of jail free" card. You made this bed; now you have to lie in it. You have to compromise.
We have a long way to go.
When problems become so intractable and obdurate, incapable of compromise by elected or appointed leaders, mass movements erupt overnight to countervail rational judgment and action. Leaders lose control of events: commonly, events wipe away the existing leadership in massive public convulsion and rapine. The result is mob rule and more revenge, then dictatorship and the end of organizational dynamism and development.
It's the old dichotomy between a truly progressive updated analogue to the New Deal or something more like the way the Bushies have been restructuring things, towards at least the foundations of an analogue to fascism. If I had to place bets on the outcome, fascism-in-pig-latin would seem to be the most likely. In short, those who created this mess are, to a huge degree, the ones who will inherit its aftermath also, with capitalism & science continuing but the enlightenment & authentic democracy going down the tubes.
That's what the likes of Lord Mansfield and that ilk have wanted all along.
and overleveraged mortgage market. Maybe normal
people will get to own homes again?
I recommend recalling Alexis De Toucqueville's words again describing conditions prior to the French Revolution.
For in a community in which the ties of family, of caste, of class, and of craft fraternities no longer exist people are far too much disposed to think exclusively of their own interests, to become self-seekers practicing a narrow individualism and caring nothing for the public good. Far from trying to counteract such tendencies despotism encourages them, depriving the governed of any sense of solidarity and interdependence; of good-neighborly feelings and a desire to further the welfare of the community at large. It immures (Definition: confines within a wall) them, so to speak, each in his private life and, taking advantage of the tendency they already have to keep apart, it estranges them still more. Their feelings toward each other were already growing cold; despotism freezes them.
see next post for rest...
His Cabinet Membership's performance were not equaled until the Administration of Harry S. Truman. Next to Lincoln,President Truman gathered together the most extraordinary group of Cabinet Officers to serve our Republic.
The Cabinet members of George W. Bush are fearful, weak, corrupt, sycophantic and arrogant reflecting the leadership traits and habits of the President they serve. this Cabinet is the most ignominous, incompetent and corrupt Cabinet to ever serve our Republic.
The CDS market is a story unto itself , a very, very big story . Estimates now have that market at 45 Trillion (that's trilllion with a "T") and many of the buyers of this risk haven't the capital to cover any serious default.
Should even a small percentage of this market go bad there is not enough money in America to cover the losses.
Andrew Leonard at 'How the world works' has a take on this market and the insurers in it ....
http://www.salon.com/tech/htww/2007/12/19/junk_bond_insurers/index.html
Seems many of the risk takers (Hedge Funds) are the very creditors of those same instiitutions!
The CDS market is so big, (45 Triillion), even a small loss in this market of 3% would crash the financial system.
What happens when the CDS insurers can't pay ? Bankruptcy for everyone involved.
Sometimes, you just gotta wonder how stupid (or greedy and stupid) people can be.
If one has a good, stable, productive business that has a good, stable, consistent product base (in this case, underwriting municipal bonds),...
Why would going out on a limb, further and further, with 'junk' products like ARM-based mortgage-backed securities seem like a good idea?
Maybe I am more (fiscally anyway) conservative than I think,... but does nobody running businesses think more than a quarter ahead any more?