What Are Bond Insurance Companies?
The last several trading sessions in the stock market, stocks either started down, and ended up, or started up, and ended down – and in both cases there was a big swing in points. Today, stocks started down, and ended up 207 points. The rationale was that the Bond Insurance companies, especially MBIA, said they are financially okay (see news story below). The market bought it, and soared into positive territory.
Bonds started with a big gain in price (lower interest rate) because those same bond insurers could hit our economy on its head all by themselves. But, as the stock market gained ground, the bond market gave up some, but not all, of its gains.
In the news today…
MBIA is a bond insurance company. When someone buys a bond, they can get insurance with the bond, and the bond insurance company promises to pay the principle and interest in case the issuer of the bond can’t pay. In the case of a city or county, that’s a pretty good bet by the insurance company. In the case of a sub-prime mortgage security, this is a very bad bet by the bond insurance company, and the issuer is a bank.
Today, MBIA declared a loss of $2.3B. Banks have written off $140B loss so far (and an additional $70B projected to be coming), and some of those losses were insured by MBIA. Standard & Poor’s rating system has threatened to lower the AAA rating for MBIA to AA, and this caused the panic in the market late yesterday, and early this morning.
MBIA declared is will be getting more equity capital injected into the company, and “everything is okay.” I say, “Time will tell.”
If MBIA and other bond insurance companies ever go bankrupt, banks will have to declare MUCH higher losses because they will be liable for the payments of non-performing debt instruments. The numbers are very big, so that’s why the market is “moved” by this news story. It is a story to watch in the future. As an aside, Warren Buffet said he wanted to buy a bond insurance company last month – so there must be money in it.
December’s Consumer Spending was a very weak 0.2% increase over the previous month. This is another sign of the very poor economy we are having right now. If Consumer Spending goes negative, and given that consumer spending is about 2/3 of the total economy, the whole economy goes south.
Unemployment Claims were up significantly 69,000 claims over the prior week, and now total 375,000 claims for last week. This is the highest unemployment claims since Katrina.
Mortgage rates have risen recently. The 30 Year Fixed Rate is now 5.68% and the 15 Fixed Rate is 5.17%.
Here are today’s Numbers:
Dow Jones 30 Industrial – 12,650 (Up 208 points)
10 Year Treasury Bond – 3.64% (down 0.09%)
Euro – $1.4865
Gold – $928 (Up $2)
Oil – $91.75 (no change)
Gasoline – $2.36 (up $0.03)