Watching the bonds

Published 12:00 am Thursday, February 14, 2008

The issue: Municipal bonds have become a victim of subprime mortage fallout.

Our position: Voters need to know all the risks involved before they go to the polls Feb. 26.

Mayor James Perkins Jr. is calling a forum to discuss the upcoming bond issue vote on Feb. 26 and not a minute too soon. Many questions have surfaced about the bond issue, and not about how the money will be spent, but if the city will be able to sell the bonds.

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The turmoil on Wall Street is affecting the bond market.

The short of it: Nobody wants to buy bonds if they can’t count on the companies that insure them.

At one time, bond insurers only guaranteed municipal bonds and didn’t take on other kinds of risks. But during the 1990s, bond insurers began to venture out into structured finance and sold guarantees on mortgage-backed securities. The mortgage crisis began last year and, with it, the worry that bond insurers will have to pay big claims, eating up the cash they need to keep their AAA ratings.

Thus, the beginning of the trickle down to the municipal bond market. If the bond insurer’s financial rating is downgraded, then the securities it has guaranteed must be downgraded, and investors don’t want to buy.

So, if nobody wants to buy bonds because they can’t count on the companies that insure them, then some kind of inducement has to be offered. Bloomberg News reported because there are too few bidders for bonds, the rates go up.

For example, rates on $100 million sold by the Port Authority of New York and New Jersey went up to 20 percent from 4.3 percent a week ago. These are big government entities.

If they have problems, what will happen to a small city like Selma?

Voters need to know the possibilities before they go to the polls.