Mass. Regulator Subpoenas Municipal Bond Insurers

By | January 25, 2008

Massachusetts’ top securities regulator on Wednesday said he issued subpoenas to a pair of municipal bond insurers, seeking information on how much the firms disclosed to cities and towns about their exposure to mortgage-related investments that have recently plunged in value.

Secretary of State William Galvin sent the subpoenas last week to New York-based Ambac Financial Group Inc. and Armonk, N.Y.-based MBIA Inc. He is seeking lists of public bonds in Massachusetts that the firms agreed to back by insuring repayment, and related documents. He gave the firms until Feb. 1 to turn over the documents.

Elizabeth James, a spokeswoman for Armonk, N.Y.-based MBIA, said the company received the subpoena and intends to cooperate fully with the request for documents. A phone message seeking comment from New York-based Ambac Financial was not immediately returned.

The two bond insurers are under review by ratings agencies for possible downgrades due to their exposure to complex investments known as collateralized debt obligations that are backed by home mortgages.

“This office wants to know when and if MBIA and Ambac disclosed to bond issuers — the cities, towns, districts and other public authorities — that their financial condition as an insurer was being severely impacted as a result of their involvement with these highly risky securities,” Galvin said.

Galvin questioned whether Massachusetts cities and towns would have relied on Ambac and MBIA for financial guarantees to ensure bond investors are repaid, had the governments known about the firms’ guarantees of CDOs.

If cities and towns are unable to repay bond investors, insurers repay the principal and interest — a guarantee that comes at a premium price to municipalities if the insurer boasts a strong rating from outside agencies that assess’ financial strength.

“Cities and towns rely on these companies in order to quickly and cost-effectively raise money for such needs as public safety, buildings and schools,” Galvin said. “The market relies on the insurance provided by these companies to price the bonds and to insure that investors get paid in the event of a default.

“If the credit quality of these companies comes into question, the impact on cities and towns is enormous, raising costs to municipalities and increasing investors’ risk,” he said.

Last week, Fitch cut Ambac’s rating to “AA,” and rival ratings agencies have indicated they are reviewing whether to follow suit in dropping Ambac’s top-notch “AAA” rating.

On Tuesday, Ambac said it was discussing ways to raise the capital to boost its reserves and potentially regain a “AAA” rating from Fitch. Ambac reported a loss of $3.26 billion in the fourth quarter after contracts it issued to cover claims plunged in value.

On Wednesday, shares of Ambac and MBIA rose sharply on news that state insurance regulators were meeting with bond insurers and could come up with government assistance to ensure that such insurance remains available for cities and towns that need financing.

Shares of Ambac jumped $5.73, or nearly 72 percent, to $13.70, while shares of MBIA rose $4.08, or 33 percent, to $16.61.

Galvin’s office also recently issued a subpoena to Merrill Lynch & Co. over its dealings with the City of Springfield, Mass., which lost nearly $13 million on risky investments that soured. Among other things, that subpoena sought lists from the Wall Street brokerage firm of investments the company sold to Springfield.

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