RE: 3 Trillion scheiss stormYou can add:
https://www.kitco.com/ind/Wallenwein/jan312008.html
Bond * insurance * disaster.
Ambac and MBIA (and to an even greater extent Security Capital Assurance, Ltd.) are two bond insurance companies whose credit ratings were infamously downgraded in recent weeks. Moody’s cut Ambac’s credit rating from AAA to AA. Just today, CNBC reported that further ratings cuts are in the works for these companies as the problems associated with the bond insurance business appear to be “much worse” than previously thought.
A bond insurer’s primary line of business is to insure bond issues by municipal and other local governments. The insurer guarantees to the buyers of the bonds that the governmental entity in question will timely make its interest and principal payments. That way, the municipalities get to take advantage of lower borrowing costs (interest) as such guarantees make their bonds more attractive in the open markets.
The reason Ambac, MBIA (and to an even greater extent Security Capital) have suffered these downgrades is that their cash positions became shaky when large portions of their reserves had to be used for payouts on their various policies.
That means their customers - municipalities and other local governments - were defaulting on their scheduled payments to bond investors. The point in time when this started happening strangely but meticulously coincided with the implosion of the subprime lending market and the metastasis of the subslime cancer to other parts of the global body economic: June-July of 2007.
Now, what could make municipal governments unable to make their scheduled interest payments on issued bonds? What is their major source of income?
Property taxes.
When people default on their mortgages en masse, the collection of property taxes naturally becomes just a bit more difficult, wouldn’t you agree?
The World Bank has this to say on the subject:
"4.05 Taxes on land and buildings are the most common form of direct revenue for local municipal governments. The ad valorem tax, or the property tax, is usually local government’s largest single revenue source. Property tax revenues are normally general purpose revenues contributing to a broad range of municipal services, particularly physical infrastructure such as roads and drainage."