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Post by jeffolie on Dec 19, 2007 15:21:04 GMT -6
Financial Day of Reckoning Approaches Today the S&P cut ACA to "CCC" junk, acts on 6 bond insurers. Standard & Poor's cut its ratings on ACA Financial Guaranty Corp to junk as part of actions on six bond insurers on Wednesday. S&P cut ACA's rating to "CCC," or eight levels below investment grade, from "A," the sixth-highest investment-grade rating. It also said it may cut Financial Guaranty Insurance Co's 'AAA' rating. Banks Study Bailing Out Struggling Bond Insurer Officials from Merrill Lynch (MER), Bear Stearns (BSC) and other major banks are in talks to bail out a struggling bond insurance company that has guaranteed $26 billion in mortgage securities, according to two people briefed on the situation, because the insurer’s woes could force the banks to take on billions in losses they had insured against. The insurer, ACA Capital Holdings, which lost $1 billion in the most recent quarter, has been warned by Standard & Poor’s that its financial guarantor subsidiary may soon lose its crucial A rating. My Comment: Not only did it lose its A rating, the rating dropped all the way to CCC If it did, the banks that insured securities with the ACA Financial Guaranty Corporation would have to take back billions in losses from the insurer under the terms of the credit protection they bought from the company. The troubles at ACA could also serve as the first real test for credit default swaps, the tradable insurance contracts used by investors to protect, or hedge, against default on bonds. In June, the value of bonds underlying credit default swaps rose to $42.6 trillion, up from just $6.4 trillion at the end of 2004, according to the Bank for International Settlements. My Comment: The entire US economy is $14 trillion or so in contrast to $42.6 trillion in credit default swaps. The entire Derivatives Trade Soars To Record $681 Trillion. "The hedge is only as good as the counterparty, or the other party, to the hedge," said Joseph R. Mason, a finance professor at Drexel University and the Wharton School of the University of Pennsylvania. “This is part and parcel of the financial innovation that has grown very rapidly in recent years.” My Comment: There is absolutely no way all the hedges can be paid. Look at the number of derivatives and swaps above as proof. Investment banks, hedge funds and insurance companies often use credit default swaps to bet on or against bonds without trading the underlying securities. Warren E. Buffett and other critics have described the contracts as financial time bombs, because they say that traders often misprice risk of default and do not set aside enough reserves to cover claims. They also note that investors have become complacent about the risks in recent years because default rates fell to historically low levels. My Comment: Those time bombs are now going off. Banks that insured securities with ACA have another reason to keep the company afloat — if it fails they may have to restate earnings they have already booked as a result of their dealings with the company. My Comment: Those earnings were a mirage. That mirage made the S&P 500 look cheap. The S&P 500 was not and is not cheap because much of the earnings were a mirage based on hopelessly unsound financial engineering. Mr. Egan and other analysts also note that ACA more than doubled its credit default business in the last 12 months; it had contracts outstanding on $70 billion in bonds on Sept. 30, up from $30 billion a year ago. The timely use of credit default swaps this summer helped large investment banks like Goldman Sachs and Lehman Brothers avoid huge losses on mortgage securities as others had billions in losses. But Jim Keegan, a senior vice president and portfolio manager at American Century Investments, questions whether the firms that sold protection will be able to pay up when losses materialize. “It’s a zero-sum game,” he said, noting that the gains at the investment banks buying the protection have to eventually result in losses for the firms they hedged with. “If you put trades on that worked so well that you bankrupt your counterparty, you will not collect on those trades.” My Comment: It is obvious here that the emperor has no clothes. There is going to be a global collapse in derivatives as soon as a key counterparty defaults. ACA is one such domino. It remains to be seen if it is THE domino or not. Last week, the New York Stock Exchange delisted ACA Capital after its stock price had collapsed and the company declined to offer a plan to bring itself back into compliance with listing standards. The stock was trading at about 40 cents over the counter on Tuesday; it traded as high as $15 in the summer. My Comment: ACA capital was delisted last week, but S&P kept its credit rating at A up until today. Actions speak louder than words. It is clear the rating agencies are hopelessly and purposely behind the curve. One look at ACA should be enough to tell anyone that the reaffirmations by the ratings agencies of Ambac (ABK), MBIA (MBI) and others are completely suspect at best, and purposeful manipulation at worst. For more on Ambac and MBIA please see Ambac Blows It ... Again. Here is something I am going to keep repeating until it sinks in: It's Time To Break Up The Credit Rating Cartel. Any talk of a bailout of ACA is fantasy. Banks are so capital impaired that a bailout is not possible. If by some sleight of hand shell game they manage to pull it off, they will most likely have to do it again with MBIA and/or Ambac. With that in mind I see MBIA hit a new 52 week low today. Neither Ambac nor MBIA deserves the AAA ratings they have. However, the ratings agencies do not want to downgrade MBIA and Ambac because it would trigger the re-rating and possible forced sale of $2.5 trillion in municipal bonds. However, the market will eventually force a downgrade those companies whether anyone likes it or not. Indeed, Professor Depew is reporting Ambac, MBIA: Prognosis Negative in today's dose of Five Things. The financial day of reckoning approaches. globaleconomicanalysis.blogspot.com/2007/12/financial-day-of-reckoning-approaches.html
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Post by jeffolie on Dec 19, 2007 15:59:04 GMT -6
Ambac, MBIA Outlook Lowered by S&P, ACA Cut to CCC (Update5) By Christine Richard Dec. 19 (Bloomberg) -- The ratings outlook for MBIA Inc. and Ambac Financial Group Inc., the world's largest bond insurers, was lowered to negative by Standard & Poor's, raising the specter of more writedowns for the companies' investment-bank clients. S&P also cut its A rating on ACA Financial Guaranty Corp. to CCC, suggesting potential default. Toronto-based Canadian Imperial Bank of Commerce said today it may have $2 billion of writedowns on U.S. subprime mortgage securities it insured through ACA. ``The hits keep coming,'' said Gregory Peters, head of credit strategy at Morgan Stanley in New York. ``It's been our view that these guys are in a much more difficult predicament than investors or the companies themselves believed.'' Industrywide downgrades would lead to losses of $200 billion on securities as some banks would have to sell their bonds in a depressed market because of investment guidelines, according to data compiled by Bloomberg. MBIA's guaranty business stands behind about $652 billion of municipal and structured finance bonds, while Ambac's insures $546 billion of debt. Both are rated AAA. S&P also reduced its outlook to negative from stable for XL Capital Assurance Inc. and placed Financial Guaranty Insurance Co.'s AAA rating under review for a possible downgrade. The actions were ``prompted by worsening expectations'' for insured nonprime residential mortgage bonds and collateralized debt obligations of asset-backed securities, New York-based S&P said. Ambac rose 48 cents to $27.46 at the close of regular New York Stock exchange trading. MBIA dropped 68 cents to $27.02. The companies have lost more than half their market value this year. `Everyone Got Greedy' The changes by S&P follow negative actions on Armonk, New York-based MBIA's guaranty business and CIFG Guaranty by Moody's Investors Service last week. Bond insurers are paying a price for expanding beyond their traditional business of backing municipal bonds to guaranteeing debt linked to riskier subprime mortgages and home-equity loans, as well as CDOs. ``Everyone got greedy and thought they were smart enough to write structured product insurance like it was the same as insuring municipal bonds,'' said Rob Haines, an analyst with CreditSights Inc. in New York. S&P ran a stress test to determine the losses bond insurers would take on securities backed by subprime mortgages, including CDOs. Losses were projected at $3.1 billion for MBIA, $1.8 billion for Ambac, and $2.2 billion for FGIC. MBIA's higher loss potential was attributed to the company's guarantees on securities backed by home equity loans, S&P said. CIBC, Merrill The ratings cut on ACA Financial, a unit of ACA Capital Holdings Inc., may lead to writedowns at Merrill Lynch & Co. and Canadian Imperial Bank of Commerce. Toronto-based CIBC said today it will likely take a large writedown because New York-based ACA insures about $3.5 billion of its U.S. subprime investments. Merrill Lynch may have used contracts with ACA Capital to pass off the market risk of $5 billion in CDOs, Roger Freeman, an analyst covering the brokerage industry for Lehman Brothers Holdings Inc., wrote in a Nov. 5 report. If ACA Capital defaults on its swap contracts, Merrill Lynch could recognize unrealized losses on those securities of about $3 billion, Freeman wrote. ACA Capital is required to post $1.7 billion in collateral if its rating falls at least two steps to below A-, management said on a Nov. 8 conference call. The rating was cut 12 levels today to CCC from A. The company said Nov. 19 it wouldn't be able to post that much or make termination payments on the contracts. ACA Capital Bailout Bear Stearns Cos. and Merrill Lynch are among several major banks in talks to bail out ACA, the New York Times reported today, citing two people familiar with the situation. ``Effectively by bailing out the monolines, they're bailing out themselves, because the hedges they thought they had with them aren't really hedges,'' said Toby Nangle, who helps oversee $37 billion as head of global aggregate business at Baring Asset Management in London. ACA Capital rose 34 cents to 65 cents in over-the-counter trading on that news. The shares, suspended by the New York Stock Exchange this week for breaching capitalization requirements, had plunged 98 percent this year. ACA Capital as of June 30 had sold protection to 31 counterparties through credit-default swaps on $61 billion of highly rated securities, including CDOs backed by subprime mortgage securities, according to filings. CDOs are created by packaging debt or derivatives into new bonds with varying ratings. Losses Grow The collapse of the U.S. subprime mortgage market has led to about $76 billion of losses at securities firms and banks this year. Subprime loans are made to people with poor credit. Ambac, the second-biggest bond insurer, guarantees $546 billion of securities. MBIA stands behind about $652 billion of municipal and structured finance bonds, while FGIC Corp., parent of Financial Guaranty Insurance Co., insured $314 billion. ``We are confident the performance of our insured portfolio and the measures being taken to expand Ambac's capital position will be sufficient to return our outlook to stable,'' Ambac Chief Executive Officer Robert J. Genader said in a statement today. For more than 20 years, the safety of bond insurance has eased the way for elementary schools, Wall Street banks and thousands of municipalities to sell debt with unquestioned credit quality. The bond insurers promise to make interest and principal payments as they come due on securities if the issuer falters. ``If these companies are going to survive, they've got to go back and focus on the core muni business,'' Haines said. Moody's, Fitch and S&P, criticized throughout the credit slump for giving excessively high ratings to asset-backed debt, took a second look at the bond insurers in the past few weeks after sweeping downgrades of CDOs. The companies had issued reports as recently as October that said the insurers were unlikely to face capital constraints because of the subprime mortgage crisis. www.bloomberg.com/apps/news?pid=20601208&sid=a0IcyRVRTZxk&refer=finance
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Post by jeffolie on Dec 19, 2007 16:09:03 GMT -6
CIBC May Take $2 Billion Writedown on ACA Downgrade (Update5) By Doug Alexander Dec. 19 (Bloomberg) -- Canadian Imperial Bank of Commerce may take additional writedowns of about $2 billion on its U.S. subprime investments after the credit rating of bond insurer ACA Capital Holdings Inc. was cut by Standard & Poor's. ``CIBC believes there is a reasonably high probability that it will incur a large charge in its financial results for the first quarter,'' the bank said in a statement today. Canada's fifth-biggest bank said for the first time that ACA's insurance on subprime holdings was worth about $2 billion as of Nov. 30. A $2 billion writedown would raise total costs from the decline in the subprime market to almost $3 billion, topping the bank's record $2.4 billion charge in 2005 to settle claims related to energy trader Enron Corp. The Toronto-based lender has already taken pretax writedowns of C$753 million ($750 million) in the past two quarters, and estimates it had C$225 million in additional writedowns in November. ``It's unlikely that CIBC can consider the counterparty creditworthy,'' and will likely have to take a writedown of as much as $2.4 billion, Dundee Securities Corp. analyst John Aiken said in an interview. ACA Capital is required to post collateral of about $1.7 billion if its credit rating falls below A-, management said during a Nov. 9 conference call. The New York-based company, which is rated only by S&P, wouldn't be able to post that much collateral, it said in a Nov. 19 filing. www.bloomberg.com/apps/news?pid=20601087&sid=a4q0b1vm7sWw&refer=worldwide
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Post by unlawflcombatnt on Dec 20, 2007 5:36:27 GMT -6
Financial Day of Reckoning Approaches.... Here is something I am going to keep repeating until it sinks in: It's Time To Break Up The Credit Rating Cartel.Sounds like a great idea to me. They've deceived everyone into thinking that financial risk is less than it actually is, leading to excessively risky borrowing and resultant asset price inflation. Without the malfeasance of the credit rating agencies, the housing and debt bubbles would never have gotten anywhere near this bad.
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Post by jeffolie on Dec 20, 2007 10:13:58 GMT -6
MBIA Admits $30.6 Billion CDO Exposure MBIA stepped up to the plate today and admitted a $30.6 Billion CDO Exposure. MBIA (MBI) said it has exposure to $30.6 billion of collateralized debt obligations it insures, including a large exposure to risky bonds known as CDO squared, sending its stocks plummeting 22 percent in early trading on Thursday. MBIA said in a statement released on its Web site on Wednesday that it has exposure to $30.6 billion of total CDOs net par that it insures. MBIA, the world's largest bond insurer, also is vulnerable to $8.1 billion of CDOs backed by high-grade collateral, 85 percent of which are risky bonds known as CDOs of CDOs, or CDO squared. "We are shocked that management withheld this information for as long as it did," said a report from Morgan Stanley, referring to the CDO-squared exposure. "This new disclosure completely changes our view of MBIA being a 'more conservative underwriter' relative to Ambac," said the Morgan Stanley report, which was co-written by analysts Ken Zerbe and Yoana Koleva. Now let's see if the rating agencies react. Will they find yet another lame excuse to avoid a downgrade of MBIA? The question at hand is not whether MBIA is "AAA" or "AA" but whether or not MBIA is complete junk. Another question is, if MBIA can withhold information like this for so long, who else is doing it? Yesterday in Financial Day of Reckoning Approaches I mentioned "S&P cut ACA Financial Guaranty Corp's rating to 'CCC,' or eight levels below investment grade, from 'A,' the sixth-highest investment-grade rating. ACA was delisted before the S&P reacted. That is how far they are behind the curve and already we can see the ratings agencies are way behind the curve again. I will once again repeat my statement: It's Time To Break Up The Credit Rating Cartel. They no longer serve any legitimate purpose. globaleconomicanalysis.blogspot.com/2007/12/mbia-admits-306-billion-cdo-exposure.html
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Post by jeffolie on Dec 20, 2007 10:51:16 GMT -6
Add to this mess the fact that monoliners collectively insure $3,300bn of principal and interest (less than 30% of it ABS) with only a $22bn capital base. Of course a downgrade of monoliners will have a severe knock-on effect of potential downgrade on muni and other bond markets; analysts have estimated that such downgrades could cause losses writedowns of about $200bn. But these risks cannot be an excuse for not admitting that the monoliners don’t deserve an AAA rating. As long as monoliners were only in the muni bonds insurance business one could have made the argument that a prudent monoliner did deserve an AAA rating; but now that monoliners have vastly expanded in the ABS world of insuring toxic RMBSs, CDO, CDOs of CDOs and in some cases even holding these assets on their portfolios such an AAA rating does not make any sense. The wariness of rating agencies to downgrade the monoliners is understandable: such a downgrade will imply an instant death sentence for any monoliner that is downgraded; it will lead to loss of business for the rating agencies themselves; and it will trigger massive losses on muni bonds. www.rgemonitor.com/blog/roubini/
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Post by jeffolie on Dec 20, 2007 11:13:12 GMT -6
Several take the cake items this morning. First MBIA comes clean on some Milky Way exposure, and credit swaps blow out. As I’ve been saying for weeks, it is astonishing that the credit raters are still studying MBIA’s AAA rating. Dec. 20 (Bloomberg) — The risk of MBIA Inc. defaulting on its bonds rose after the company disclosed it had insured $8.1 billion of a complex security linked to repackaged subprime mortgages. Credit-default swaps tied to Armonk, New York-based MBIA’s bonds soared 115 basis points to 595 basis points, the widest on record, according to CMA Datavision in London. Demonstrating in spades just how ludicrous this whole scene is, the rating of ACA Capital was finally reduced twelve notches in one move. Banks “study” another in a series of smoke and mirror ploys to “bail out” this dead man walking. Where’s the love? NEW YORK — Standard & Poor’s Ratings Services on Wednesday slashed the credit rating of troubled bond insurer ACA Financial Guaranty Corp. to junk status and put Financial Insurance Guaranty Co. on watch for downgrade. S&P cut ACA 12 notches from a solidly investment-grade single-A to triple-C, a rating that hovers above the defaulted category. When the obvious downgrades of the other major bond insurers follows, it promises to wreak havoc on an already weakening muni market. Players in today’s market are shockingly reactive, and not preemptive on these time bombs. Readers would be advised to be the later. Not too surprisingly there was also a big hedge fund presence speculating on this sector. “There’s no money flowing into the market right now from hedge funds, banks or anywhere else,'’ said Thomas Metzold, manager of the $6 billion Eaton Vance National municipal fund in Boston. “The banks have other needs for their capital.'’ This is not just a one off event, as now billions in credit default insurance is rendered moot, forcing other chumps to acknowledge their Milky Way trash. Dec. 19 (Bloomberg) – Canadian Imperial Bank of Commerce may take additional writedowns of about $2 billion on its U.S. subprime investments after the credit rating of bond insurer ACA Capital Holdings Inc. was cut by Standard & Poor’s. wallstreetexaminer.com/blogs/winter/?p=1284#more-1284
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Post by jeffolie on Dec 20, 2007 11:20:26 GMT -6
ACA was downgraded from "A" to "CCC". In one move. This also caused a cascade of downgrades on other bonds and in related actions, S&P also put MBIA and Ambac on "negative" watch. This is extremely serious, and has come much more quickly than I expected. The short version of what this means is: You have to wonder why the markets would be rallying the last couple of days when there are nuclear weapons ticking out there. Indeed, you have to wonder why we're not already under 10,000 on the DOW. Well, tonight you got a hint of what is to come. Few will understand the significance of this move, at least initially. Soon, everyone will, and not in a good way. There will of course be people who will claim that these guys will be "bailed out." The problem is, they can't be. These insurers wrote tens of billions of dollars in swaps - insurance contracts basically - guaranteeing that bonds would not default. Unfortunately, a large number of the bonds they wrote these contracts on are subprime mortgage related - either directly, or CDOs that are comprised of them. Like most of the other "insurers", these firms have exposure that makes their market cap and cash position look at a bad joke. For example, MBI has a market cap of $3.39 billion and cash of $3.92 billion. Yet it, along with the other "monolines", have insured hundreds of billions worth of bond issues. Needless to say they can't possibly hope to pay off on any more than a tiny percentage of those issues. Now the defaults are starting, and so are the downgrades. The downgrades mean that these issuers can no longer write any more swap contracts. Their income stream will be cut off, at the same time that radically more defaults than planned for will occur. I'm sure you've heard that Goldman has "hedged" off their risk, and this is why they made so much money while the other folks in the room lost. What you didn't probably understand is that so far this is all accounting fiction - nobody has actually given anyone any money on those hedges. But now, those hedges are worthless. The risk, which was believed to have been laid off, was not really laid off. These companies never had a prayer in hell of actually performing on their obligations. Never. Yet in the world of derivatives, if one person wins, the other lose. So let's say that I have a $1 million dollar bond and I buy a swap guaranteeing it. Let's also say that the bond pays 7%, and I pay 1% (face) to insure it to maturity. Cool - I have 6% risk free, right? Uh, not exactly. What if the person I bought the swap from doesn't have the money when the bond defaults? Now I not only didn't make 6% risk free, I take the capital loss on the bond! This is where we are today. These investment banks have booked "earnings" and "revenues" that are based on the concept of the risk being "laid off" on these insurers. But these insurers can't actually pay on the hedges; in effect, the investment banks (and others) bought a blank piece of paper for their premium instead of actual insurance! How did this happen? It happened because all of these swaps are written over the counter and there is no regulation of capital ratios, nor are these swaps traded on a public exchange, nor is there any supervision of margin requirements! When YOU buy a stock on margin you are only allowed to buy twice as much stock as you have CASH. That's 50% margin. If you trade futures, you can be levered up 20:1, but only an idiot gets close to that line, because the smallest move the wrong way generates an instant margin call. But in the real world these guys wrote an essentially unlimited amount in swaps, even though they couldn't pay out on anything other than a tiny fraction. The ratings agencies claimed these were "AAA" securities, with a minuscule odds of default. They were wrong. There was no supervision of the margin capacity of these firms, so they're geared at 100 or even 200:1, or perhaps more. Nobody knows for sure. But what we do know for sure is that they won't be able to pay off on the defaults. This will cascade through the banking, pension and other fund systems. It will totally screw municipalities who need to issue debt, as they won't be able to get the insurance any longer (not that its worth anything anyway.) It will cause restatements on investment bank and pension fund balance sheets (along with others), as they find that the "insurance" they bought that supposedly "guaranteed" their investments is worthless. It will impact capital ratios. Exactly how far the cascade will go is indeterminate, but what is certain is that it is real, it will be bad, and it will hit in places where you don't expect it, along with the places you do. market-ticker.denninger.net/
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Post by jeffolie on Dec 20, 2007 16:35:03 GMT -6
Fitch puts MBIA on Negative Ratings Watch From MarketWatch: Fitch puts MBIA on ratings watch negative after CDO review Fitch Ratings put several ratings of MBIA Inc. on Rating Watch Negative on Thursday because of the bond insurer's exposure to structured finance collateralized debt obligations ... Yes, more "closing the barn door". calculatedrisk.blogspot.com/2007/12/fitch-puts-mbia-on-negative-ratings.html
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Post by jeffolie on Dec 21, 2007 11:32:19 GMT -6
SAN FRANCISCO -- Fitch Ratings said on Friday that it may cut Ambac Financial's AAA rating because of potential losses and downgrades of collateralized debt obligations guaranteed by the bond insurer. The AAA rating of Ambac's bond insurance unit was put of Rating Watch Negative by Fitch, which means the agency will downgrade to AA+ in four to six weeks unless the company can boost is excess capital levels before then. A review by Fitch of Ambac's exposure to CDOs and residential mortgage-backed securities found that the insurer is roughly $1 billion short of the extra capital it needs to keep its AAA rating, the agency explained. The review included an assessment of a $3 billion commitment by Ambac to fund a pool of other structured finance CDOs as of Sept. 30, Fitch noted. Ambac shares fell 4.2% to $26.55 during midday trading on Friday. www.foxbusiness.com/markets/industries/finance/article/fitch-warns-cut-ambacs-aaa-rating_417436_9.html
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Post by jeffolie on Dec 21, 2007 14:39:57 GMT -6
Analyst warns Merrill's write-downs may mount "We believe Merrill, like its peers, has entered hedging contracts with ACA [Capital Holdings]," Trone said. "Should ACA falter, Merrill would end up with more subprime exposures as those hedging contracts terminate. This will in turn lead to more write-downs." US$ & Monoline Bond Insurers The main theme of the banking debacle in 2008 will be the extension far beyond subprimes into PRIME mortgages, as fully detailed in the article last week. The impact fallout from the bond insurers might hit home soon, as Wall Street will be forced to bring countless more wrecked billion$ in mortgage bonds onto balance sheets. housingpanic.blogspot.com/
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Post by unlawflcombatnt on Dec 23, 2007 5:21:26 GMT -6
Ambac, MBIA Outlook Lowered by S&P, ACA Cut to CCC (Update5) By Christine Richard Dec. 19 (Bloomberg) -- The ratings outlook for MBIA Inc. and Ambac Financial Group Inc., the world's largest bond insurers, was lowered to negative by Standard & Poor's, because of the subprime mortgage crisis.... For more than 20 years, the safety of bond insurance has eased the way for elementary schools, Wall Street banks and thousands of municipalities to sell debt with unquestioned credit quality. The bond insurers promise to make interest and principal payments as they come due on securities if the issuer falters.... And these "elementary schools", Wall Street banks, and "thousands of municipalities" have been living well beyond their means for far too long. If schools and municipalities can't finance their pet projects with tax revenue, then they should cancel the project. Bond issues just mean that taxpayers in the future will have to pay for today's pet projects.
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