Massachusetts Subpoenas MBIA and Ambac Over Disclosure

A reader pointed us to the fact that the State of Massachusetts has issued subpoenas to MBIA and Ambac regarding bond issued by Massachusetts cities and town that they guaranteed from January 1, 2006 onward. According to CNN, the state is investigating whether the insurers made adequate disclosure of their involvement in mortgage-related instruments. Put more simply, could a reasonably inquisitive mind have figured out the bond insurers might be a wee bit overextended?

It is pretty much certain that the bond insurers did not tell the municipalities about their rapidly growing book of securitization risks. I am no expert, but the issue of liability will probably revolve around whether the insurers had an obligation to reveal more than was presented in their public financials and insurance filings, or similarly, whether any of the municipalities attempted to do due diligence and were given less than complete answers.

Needless to say, if the Massachusetts investigation looks like it will lead to a lawsuit, it represents another set of claims against already weak balance sheets, and will make any rescue operation even more difficult.

From CNN:

Massachusetts’ top securities regulator on Wednesday said he issued subpoenas to a pair of municipal bond insurers, seeking information on how much the firms disclosed to cities and towns about their exposure to mortgage-related investments that have recently plunged in value.

Secretary of State William Galvin sent the subpoenas last week to New York-based Ambac Financial Group Inc. (NYSE:AKT) (NYSE:AKF) (NYSE:AFK) (NYSE:ABK) and Armonk, N.Y.-based MBIA Inc. (NYSE:MBE) (NYSE:MBI) He is seeking lists of public bonds in Massachusetts that the firms agreed to back by insuring repayment, and related documents. He gave the firms until Feb. 1 to turn over the documents….

‘This office wants to know when and if MBIA and Ambac disclosed to bond issuers — the cities, towns, districts and other public authorities — that their financial condition as an insurer was being severely impacted as a result of their involvement with these highly risky securities,’ Galvin said.

Galvin questioned whether Massachusetts cities and towns would have relied on Ambac and MBIA for financial guarantees to ensure bond investors are repaid, had the governments known about the firms’ guarantees of CDOs.

If cities and towns are unable to repay bond investors, insurers repay the principal and interest — a guarantee that comes at a premium price to municipalities if the insurer boasts a strong rating from outside agencies that assess’ financial strength.

‘Cities and towns rely on these companies in order to quickly and cost-effectively raise money for such needs as public safety, buildings and schools,’ Galvin said. ‘The market relies on the insurance provided by these companies to price the bonds and to insure that investors get paid in the event of a default.

‘If the credit quality of these companies comes into question, the impact on cities and towns is enormous, raising costs to municipalities and increasing investors’ risk,’ he said.

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  1. doc hates SIFMA & crooks

    Oy, but hyperactively related:

    Sen. Richard Shelby, R-Ala., the senior Republican on the Senate Committee on Banking, Housing and Urban Affairs, said it’s imperative to increase control over Fannie and Freddie before allowing the companies to take on additional risk.
    “Doing so in the absence of such a process enables thinly capitalized entities with recent accounting problems to provide a high-risk benefit to the wealthiest Americans without any real consideration of the need to do so or of the risks it presents to the taxpayer,” Shelby spokesman Jonathan Graffeo said in an e-mail.
    Sen. Mel Martinez, R-Fla., said a better compromise would be to expand loan limits for a shorter period, 90 to 120 days. Then, those limits would expire unless lawmakers pass a long-delayed oversight bill, he said.
    The government agency that regulates Fannie and Freddie, the Office of Federal Housing Enterprise Oversight, said in a statement Thursday that raising the limits for Fannie and Freddie without providing stronger government control “would be a mistake.” Fannie and Freddie both support the change.

  2. sal

    Bill Galvin is a hack. This man is the classic scumbag MA politician. His nickname on Beacon Hill is the Dark Shadow. He is known for anonymously calling the local newspapers to plan stories to benefit himself. He strangely wonders around downtown boston by himself on a regular basis. This no-talent leach is not capable of comprehending the issues involved here and is not interested in these issues either. He’s not looking to help anyone but himself. Men like him make the world a worse place.

  3. Anonymous

    I like Galvin, he at least seems to be hunting for corruption and making headlines to educate people that there are issues which are suspect and in most cases illegal. I guess if you were on the side of the manipulation or someone party to non-public information that is exposed he would seem to be a scumbag. He serves a need, as in looking into the bond fraud in Florida and this issue related to Ambac; whats not to like with this scumbag?

  4. Anonymous

    No one likes to admit that the cops and the crooks are cut from the same cloth. Spitzer was hated in the business community but wildly popular with the public at large as NY AG. It didn’t hurt that he presented well in the media, apparently unlike Gavin.

    Litigators are generally intense and obsessive. Some hide that better than others.

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