One Small Step for a Beaten-Up Insurer and a Battered Muni Market

Author: John Mousseau, Post Date: September 2, 2008
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John Mousseau is a portfolio manager and heads the tax-free Muni section of Cumberland.  He is a member of the Management Committee of Cumberland Advisors.  His bio is found at www.cumber.com.  His email is John.Mousseau@cumber.com

This past week, Financial Guaranty Insurance Corporation (FGIC) announced that Municipal Bond Insurance Corporation (MBIA) would reinsure $184 billion of FGIC’s municipal bond book of insured bonds. We think this is a positive development for FGIC and the bond market.

This means that MBIA – in return for insuring FGIC’s bonds – will receive, over time, $741 million in unearned premium income from the FGIC insured bonds.  In addition, FGIC has paid $200 million to a French bank, Calyon, to commute its exposure to Collateralized Debt Obligations (CDOs)

There are three results from this which should be positive for the beaten-up municipal bond market in general, MBIA overall and FGIC-backed bonds in particular.  First and foremost, this will free up capital for FGIC.  This is important for the ongoing business of FGIC – even if it is in a runoff position.

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