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ABSTRACT. This paper addresses risk exposures in insured portfolios of monoline firms for 1995-2010. US public finance exposures decreased dramatically during the period, while US structured finance and international finance exposures grew significantly. By 2007, combined non-public finance insured exposures were from 30% to over 80% of financial guaranty portfolios. Regulatory and statutory requirements, however, did not change as rapidly. Capital reserve requirements were adequate to withstand the public finance default rates but not the structured risks in asset-backed debt, CDOs or CDSs. As a result, the monoline industry today is a one-and-ahalf- firm business with uncertain future. Municipal bond market insurance penetration was about 5% in 2010 guarantying about $27 billion in new money issued. This is a far smaller industry than the one that existed in 2007 prior to the Great Recession.
INTRODUCTION
This paper surveys the insured portfolios of financial guaranty firms to gauge the risk exposures by three portfolio areas from 1995 to 2010. I study the choices in domestic public finance, domestic structured finance, and international finance portfolios of bond insurance firms. A comprehensive survey of insured portfolios helps to answer the question - "How did we get here?" Further answers to the same question stem from a review of statutory environments for monoline firms, their capital reserve requirement rules, and the premiums earned during the period under review. I then discuss the post-recession state of affairs in the bond insurance market and the efforts that we ought to take to reconfigure the market. Based on the findings of the paper, I outline a set of policy relevant conclusions and observations.
The recession of 2007-08 was a crisis of catastrophic proportions for the financial guaranty industry. Nowadays, the municipal bond insurance market remains in a very fragile state since the Great Recession. All, except two monoline firms - AGC and BHAC2, are under bankruptcy, regulatory administration, legal challenges, commutation disputes or reorganization. Of the nine major monoline insurance firms that existed prior to the crisis, seven discontinued writing financial guaranty business (ACA, Ambac, CIFG, FGIC, MBIA, Radian, and XLCA) and the two remaining firms (AGC and FSA) have merged to form a single entity in 2010. The State of New York invited Berkshire Hathaway to rescue the industry by...