The Insurance Charade

A Lot of Money

In filings other than annual reports, such as investor presentations, the four largest bond insurance companies -- MBIA, Ambac, FSA and FGIC -- report that they've paid out on less than 0.01 percent of the total debt from all municipal bonds they've ever insured. MBIA said it had losses of $466 million in the past 20 years on $2 trillion of municipal bond debt service. FGIC reported losses of $62 million on its total of $959 billion of insured municipal debt since the company's inception.

By comparison, the property and casualty insurance industry reported claims of $311.4 billion on premiums of $417.7 billion, with claims representing 74.6 percent of premiums, in 2005, according to regulatory filings. In 2004, property and casualty claims were 62.1 percent of premiums; in 2003, claims were 60 percent of premiums.

``Municipal bond insurers make a lot of money, but I can't really see any need for insurance if a bond is already guaranteed by a state or a municipality,'' Hamline University's Schultz says. ``If you think rationally about it, it sounds a lot like extortion, and the people who are put on the hook are the taxpayers.''

Accounting and Disclosure

More than a quarter of MBIA's reported losses came from bonds it insured for one of its own subsidiaries that had bought tax liens, or delinquent tax bills. Fitch criticized MBIA's decision to insure those bonds because, it wrote, it presented a potential conflict of interest since MBIA as it allowed the company to avoid disclosing its financial exposure to its subsidiary.

In an October 2005 report, Fitch wrote, ``Fitch believes such management actions are aggressive for companies that are assigned its highest credit ratings.''

Moody's wrote that MBIA's investment in the subsidiary exceeded what was appropriate for a Triple-A-rated financial guarantee company.

Regulators, including the U.S. Justice Department and Securities and Exchange Commission, have sought information from MBIA for the past two years as part of a broad investigation into accounting and disclosure by the company.

Claims Against Insured

MBIA has said it expects to pay $75 million to settle the part of the investigation related to a Pennsylvania hospital group that filed for bankruptcy in 1998 with $256 million of MBIA insured debt outstanding.

Municipal bond insurers say they're one of the only types of guarantee companies that have the right under most contracts to make claims against the insured if there's a default. The industry says it has a so-called zero-loss policy. Even if the companies make a bad call and insure a bond that may have been too risky, bond insurers expect to be repaid by the issuer.

A waste-processing plant in Crisp County, Georgia, defaulted on $69.6 million of bonds in November 2000. FSA has been making payments to bondholders since. It has sued the underwriter of the bonds, Little Rock, Arkansas-based Stephens Inc., in federal court alleging fraudulent disclosure. In May, an appeals court upheld FSA's right as an insurer to sue under federal securities laws. Stephens denies the allegations and says it plans to dispute FSA's allegations in court. The case is pending. This municipal bond is the only one on which FSA has ever taken a loss.

Started in the 1970s

The municipal bond insurance industry started in the 1970s. The first policy was sold in 1971 by Ambac, insuring a $650,000 bond for the Greater Juneau Borough Medical Arts Building in Alaska. In the early 1980s, as New York City considered filing for bankruptcy protection, the bond insurance industry grew, and Ambac was joined by MBIA and FGIC.

In 1983, in the largest default in U.S. municipal bond market history, the Washington Public Power Supply System defaulted on $2.25 billion of bonds sold to pay for five nuclear power plants. The utility didn't have insurance, and that collapse led to increased demand nationwide for municipal bond insurance.

Two years later, FSA was founded. By 1993, more than a third of new municipal bonds were insured, a year before Orange County, California, became the largest municipal bankruptcy in U.S. history.

Trinity Flood Plains

In 1998, more than half of new municipal bonds were insured. In 2005, $228.1 billion, or nearly 56 percent, of the $408.3 billion of new, long-term municipal bonds were insured.

The empty fields in Texas that brought taxpayers as much as $311 million in debt illustrate the odd relationship between bond insurers and public issuers. The example also shows that a bond insurance company takes fees of more than $11 million, assuring a triple-A rating for a new issuer facing financial risk in a first-time, unproven venture.

The Las Colinas controversy in Texas revolves around an incomplete development near the Dallas/Fort Worth International Airport. It was the dream of multimillionaire Ben Carpenter, who spent millions turning 12,000 acres (4,900 hectares) surrounding his Hackberry Creek Ranch, located in flood plains along the Trinity River, into a sprawling community of offices, homes, resorts and golf courses, complete with interconnecting canals and lakes.

Wooden Canal Boats

Carpenter, who was 82 when he died of natural causes in March, had a fleet of wooden canal boats made in Venice to ferry office workers around Las Colinas. The monorail- like system called a people-mover was never completed. Most of the streets, roads, sewers and water lines in Las Colinas were funded by steadily increasing property taxes.

``The project was fraught with waste,'' says Gene Phillips, who manages a number of real estate investment companies and holds property in and around Las Colinas.

Today, the development, with real estate worth at least $7 billion, includes offices for Exxon Mobil Corp., Kimberly-Clark Corp., Microsoft Corp. and Nokia Oyj. Because of gerrymandering that Carpenter worked out years before those companies moved in, none of those corporations were included in the Dallas County Utility and Reclamation District, which means they pay no taxes for Las Colinas.

Carpenter worked with local officials to create the district solely to issue bonds for Las Colinas.

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