Two more bodies to fall in economic mess

There are two more bodies yet to fall in the economic mess created by the subprime lending industry: public bond insurers and home construction firms.

Public bond insurers protect bonds sold by cities like Nashville, Mt. Juliet and Franklin. By underwriting the bonds, they are telling buyers that the projects the bonds will fund are well supported by revenues and are worthy of investment. The higher the bonds are rated by the insurers -- companies like Ambac and MBIA -- the more attractive the bonds are to buyers.

Should the bond insurers be wrong, they'll guarantee payment to bond investors. That results in lower interest rates on the bonds -- saving the public money -- but greater security for bond buyers who want predictable earnings.

If these insurers collapse, the bond buyers get very worried and the ratings on the bonds, go down. That means the bond buyers face a more difficult time in selling those bonds should they decide the risk is greater than they want to experience.

The problem has come because the bond insurers were also playing in the subprime market. When the crash came, companies like Ambac, whose stock was selling for more than $96 a year ago, has dropped to a low of $4.50. MBIA went from $72.38 to $6.75.

That drop in value is expected to result this week in banks rushing in to invest in the company. Banks are the primary buyers of the bonds, so it is in their best interest to see that the insurance stay in place.

While the public might dodge this bullet, changes are needed and a proposal by MBIA to help fix the problem is being shunned by others. MBIA believes the insurers must separate their bond insurance activities from their asset-backed programs. MBIA left its main trade group, the Association of Financial Guaranty Insurers, because it could not find support for the reform.

The other group that is about is be impacted from the subprime disaster is homebuilders. They make their money off selling new homes, but that's difficult in a market where so much inventory has come on the market from defaults and where money is less available for borrowers. Homebuilders with unsold properties are stuck with little cash coming in, but continuing debt to finance on those unsold homes.

Already that's beginning to happen. Corinthian Custom Homes in Franklin is moving into bankruptcy proceedings and the same is happening to other firms around the country. Major home builders are also worried about their futures and have begun laying off workers.

In both these cases, and in other problems created by players in the subprime market, the problems could have been avoided with greater federal oversight. Yes, the market may begin to correct itself, but that only comes after savings are lost and lives are damaged. The companies weather the storm and take care of themselves, individuals and small business people are the ones who pay the ultimate costs.

It's government's job to protect its citizens, not to give business free reign to manipulate the market to its advantage.

    -- Jim Grinstead

Comments

[fke]

"It's government's job to protect its citizens, not to give business free reign to manipulate the market to its advantage." Exactly and,of course, the last will continue to be last. The almighty market is just people trying to play by the rules written by legislators who are funded by lobbyists.