Friday, May 1, 2009

Bond Insurer Ordered By Regulators to Stop Payments

Syncora, aka SCA, was ordered by regulators to stop paying out claims, triggering a default on $18 billion in credit default swaps written on the bond insurer’s own debt. The likely payout on the CDS is estimated to be around $1 billion. However, Syncora has guaranteed more than $140 billion of bonds, mainly municipal debt and structured finance. This is the first of the bond insurers, a mini-me of Ambac and MBIA, to have been forced to cease paying claims. This clearly is not a positive sign of things to come for the other bond insurers.

Remember when buying insurance was a no-brainer? So if I buy some muni-debt, not only is it backed by government receipts but it also comes with insurance! What a great risk-free investment! Want to protect a family in case of an untimely death? I’ll just give AIG a call and get some life insurance! What if I buy a new car and it happens to be a lemon? No problem, it came with a warranty from GM, better yet Chrysler. Remember when you didn’t have to look at a company’s balance sheet to determine if it was a safe company to buy insurance from? Now, not only do you have to figure out if the company will still be solvent, but also if it’s a big enough clustersuck to be considered enough of a systemic risk to be bailed out by the government. Might as well put all your extra cash into Citigroup because it has to be the most guaranteed systemic risk around.

1 comment:

Anonymous said...

Clustersuck, great word!