Massachusetts subpoenas MBIA and Ambac

William Galvin, secretary of the commonwealth of Massachusetts has subpoenaed bond insurers MBIA Inc. and Ambac Financial Group. The two bond insurers are now being investigated by state regulators. Mr. Galvin said that last week he had requested a list of Massachusetts public-issuer bonds insured by the companies since January 2006. He is trying to determine if MBIA and Ambac had informed Massachusetts’ cities and towns of their exposure to collateralized debt obligations. The insurers have until Feb. 1 to comply. Ratings agencies haven’t looked too kindly on the insurers and have slashed ratings on the companies’ financial strength: Fitch Ratings slashed its ratings on Ambac to AA from AAA. Also, yesterday, the National Association of Insurance Commissioners voted on a set of guidelines for bonds insured by ACA Financial Guaranty Corp., a company that’s been downgraded to CCC from A by Standard and Poor’s. Downgrades on bond insurers also affect the ratings on the municipal bonds they cover. S&P later suspended the rating of ACA insured bonds for which the issuer hasn’t sought an S&P pubic underlying rating, or SPUR. SPURs rate the strength of the issuer rather than the strength of the bond insurer. The NAIC’s valuation of securities task force said that it had been using SPURs to judge all ratings of underlying bond quality through the rating agencies. The Valuation of Securities task force of NAIC matched its one-through-five ratings to the SPURs, with one being the highest and five the lowest. It also provided guidance on how insurers can report those bond ratings to the VOS for 2007 and 2008. See the guidelines here.