Oct 8, 2008 5:02 pm US/Pacific
San Francisco Sues Municipal Bond Insurers
SAN FRANCISCO (AP) ―
San Francisco's city attorney filed a lawsuit Wednesday accusing five bond companies of selling California cities insurance policies that have become worthless because of the nation's mortgage meltdown.
City Attorney Dennis Herrera alleges in the lawsuit that the top five bond insurance companies failed to disclose that they insured billions of dollars of risky mortgages. When the mortgages started defaulting at high rate, the insurance companies' credit ratings were downgraded.
Herrera said that the downgrades caused the municipal insurance policies to "become basically worthless" because the insurance no longer helps the cities maintain low interest payments. The lawsuit claims that some cities also had to pay more interest because of the insurance companies' credit downgrades.
The suit further alleges that the five top bond insurance companies conspired with credit agencies to charge cities higher premiums. The five companies are: Ambac Financial Group Inc., MBIA Inc., XL Capital Assurance Inc., Financial Guaranty Insurance Co., CIFG Assurance North America, Inc.
Cities routinely borrow billions of dollars to finance the building of schools, roads and other large public projects. They promise to repay the loans—or the bonds—over time.
Cities with high credit ratings can lower their interest payments and boost their credit scores if they buy insurance that promises to pay back loans in case of a default.
But Herrera said in the suit that California cities needlessly have paid hundreds of millions of dollars to obtain bond insurance "as municipalities rarely, if ever, default."
Since corporations borrowing billions of dollars aren't required to buy bond insurance to get the lowest interest rates possible, the bond insurers have conspired to maintain that dual rating system because they knew it was the backbone of their entire industry," he stated.
Herrera said that a mere .06 percent of municipal bonds failed compared with .3 percent failure rate of corporate bonds. San Francisco has raised $3.2 billion since 2004 through municipal bonds.
Spokespeople at the insurance companies named in the suit declined comment or didn't return telephone calls.
Los Angeles, Stockton and Oakland have recently filed similar lawsuits.
(© 2009 The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.)
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