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Scary Munis

26 October 2017 by lberuti

That MBIA is still standing is quite astonishing. As one of the largest providers of insurance asset- and mortgage-backed securities, it was among the most vulnerable companies when the US housing market imploded in 2007. To stabilize its financial position, it had to eventually split its municipal bond insurance business off into an independent subsidiary, National Public Finance Guarantee Corporation, from the riskier MBIA Insurance Corporation which provides global structured finance products and non-US public financial guarantees. Because of the massive burden the subprime mortgage-backed security implosion imposed on MBIA Insurance Corporation, it has been seen for a long while as the riskiest part of MBIA and its risk premium has since the great financial crisis traded at much wider levels than the risk premium of the whole of MBIA. With the problems faced by the City of Hartford which sounded the first alarm bells and more recently with the crisis facing Puerto Rico, investors have had to reassess their appreciation of the risk of insuring municipalities’ debt. Since late September, not only has MBIA’s risk premium caught up with MBIA Insurance Corporation’s risk premium, it is now trading at substantially more discounted levels. From roughly 350bps cheaper (300bps vs 650bps), it is currently 100bps more expensive (1101bps vs 1002bps).