THE ROT SPREADS

The sub-prime meltdown, another gift to all of us from the Masters of the Universe, is starting to get some people worried about the companies that insured the bonds. U.S. municipal bonds are also being affected.


Worries over distressed bond insurers
By Joanna Chung in London and Stacy-Marie Ishmael in New York
Published: November 5 2007 21:36 Last updated: November 5 2007 21:36
FINANCIAL TIMES


The deterioration in sentiment for insured bonds comes amid fears that specialist insurers – which provide credit guarantees to lenders and investors – could succumb to wider mortgage-related problems in the US.

MBIA and Ambac, the two biggest bond insurers in the US, have seen their shares plunge in recent weeks. They are now trading at 52-week lows.

Bond insurers guarantee a range of bonds, including complex securities backed by mortgages and less risky municipal bonds issued by US states and cities.

If top credit ratings of any of the insurers, often called “monoline” insurers, come under threat, investors fear that the value of bonds they have insured could also suffer.

Sentiment for US municipal bonds has also suffered. Spreads on insured AAA bonds have started to widen against similarly rated bonds that are not insured, analysts say. About half of the $400bn worth of bonds issued each year are insured.

Another FT article highlights the key problem:

Frederic Mishkin, a Federal Reserve governor, admitted that although the central bank could use monetary policy to offset the macroeconomic risk arising from the credit squeeze, it was “powerless” to deal with “valuation risk” – the difficulty assessing the value of complex or opaque securities.


So, how were these opaque instruments invented? Who gave them ratings? Who made money by selling them?