Monolines: The End of the World as We Know It

NEW YORK ( TheStreet) -- Foreclosures, regulation and the issues surrounding mortgage securitization placed doubts in the minds of many regarding the future of monoline insurers.

But events over the past month -- including a major bankruptcy -- has cemented a dark future for the financial guaranty business in the minds of many industry professionals.

"I don't think there is any future for any of the bond insurers," says Edward Grebeck, CEO of Tempus Advisors in a video interview with TheStreet.

Grebeck argues that a major revenue stream for the monolines, in the form of backing local government-backed debt, has been all but cut off. "No one is going to wrap municipal bonds. Basically, the investment market has gotten used to the idea of unwrapped municipal bonds."

Ambac ( ABK)'s bankruptcy filing has left only two players -- MBIA ( MBI) and Assured Guaranty ( AGO) -- in the municipal bond business.

Only Assured Guaranty writing new business, and it recently received a downgrade by Standard & Poor's from a AAA to AA+ based on the uncertainty surrounding the industry. Without AAA ratings, it's harder for these companies to sell new coverage.

Grebeck argues that financial guarantors have historically underpriced the risk on the bonds they are wrapping. The insurance operations of Ambac and MBIA, in particular, were placed in run-off after losses on subprime mortgages and home-equity loans.

Morningstar Analyst Jim Ryan does not project as dire consequences for the monoline industry. "I do believe there is a need for some bond insurance, mainly limited to muni bonds," Ryan told TheStreet.

Ryan argues that Assured Guaranty's business model will pave the future for the municipal bond business. Ryan says Assured Guaranty's business is strong, adding the firm underwrote 10 percent of all municipal bonds, issued 24 percent of the A-rated bonds and wrapped 14 mini bonds over $1 billion in the third quarter.

Ryan argues that that while the industry will be much smaller, but is still needed.

Assured Guaranty's future is a bit more certain than its competitor MBIA. MBIA has said they have enough cash at the holding company until 2014, but some are questioning if they have enough to satisfy the outstanding claims, Ryan said.

The foreclosure crisis will also determine the monolines future since they guaranteed, or wrapped, many of the mortgage-backed securitizations (MBS) that are currently failing. Recently, the monolines have rebounded since mortgage "put backs" have limited failure claims against MBS.

"The foreclosures are only going to accelerate those losses and will affect the monolines. Their whole future is determined on a lawsuit," Ryan said. "Put backs would be reimbursements on the packages they issued. That would work for them and their claims, but it is difficult to see where they will end up in the future."

MBIA recently said that its estimated recoveries related to put backs from lawsuits on several banks including Bank of America ( BAC) of $2.2 billion. The monoline also reported a $213 million loss in its third quarter earnings.

MBIA had a plan to write new business, similar to Assured Guaranty, but that was curtailed by lawsuits 18 banks brought against the company's restructuring. Under the restructuring MBIA would break into two; a good insurer and a bad insurer. The insurer moved $5 billion in assets and the profitable business and assets into a new entity called National Public Finance Guaranty Corp. That has left the old business with a questionable amount of capital to cover the banks' guarantees.

"If you are buying a share in one of the bond insurers-- Ambac or MBIA-- you are basically betting on the outcome of the litigation process in bankruptcy, and that is the only reason you would want to take a chance on those companies now," said Grebeck. "Basically if you buy a share you are basically buying their argument that they will get something back."

Grebeck argues that MBIA will have difficult convincing investors they can turn the business around.

"MBIA will tell you and has told you for the last 10 years that everything is hunky- dory," Grebeck adds. "We know that in the case of Ambac that was not so. A couple weeks ago people were saying that Ambac had sufficient claims paying reserves, and then they filed for bankruptcy."

--Written by Maria Woehr in New York.

To contact the writer of this article, click here: Maria Woehr.

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