Municipal Bond Forum
MBIA and investor comfort
Q
Like many other Americans, I am growing weary of corruption and fraud in major companies. The most recent company facing serious allegations of misconduct is MBIA (Rating Agencies Say MBIA Still Solid), no small player in the municipal bond market. Is this the tip of an iceberg? Are the bond insurance companies so eager to issue and so closely tied to the ratings agencies that they are getting reckless? It seems to me that most municipal bonds are now insured, clearly suggesting to a trusting public that there is little risk of default. Some of these insurers have been in business for only a relatively short time and have hundreds of billions of dollars in guarantees out there. Where can investors get information on the underlying credit ratings of muni bonds? Most brokers and dealers show only AAA when the bond is insured. False comfort?
A
James A. Klotz responds:
While we don’t know the outcome of investigations into MBIA’s management practices, we do know they have an extremely strong capital base supporting the insurance contracts they have written. In addition, MBIA mainly insures large visibility credits in the tax-exempt market, which normally have strong investment grade credit quality on their own. The same is true for other bond insurers.
In many cases, underlying credit ratings can be obtained directly from the rating agencies themselves. However, in-depth analyses usually require an expensive subscription. You might try the Web sites for S&P, Moody’s and Fitch to see which bonds you own have public ratings.
Finally, we are confident in the level of review all three rating agencies conduct on the bond insurers on an ongoing basis. Both the transactions and capital adequacy of bond insurers are reviewed continually and must meet target levels to maintain their ratings. It is a rare occurrence for a bond insurer to fall short on these measures.
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