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

Author: John Mousseau, Post Date: September 2, 2008

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  His email is

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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