Municipal Bond Insurer Resents Being Called Upon to Make Payments After Bonds It Insured Defaulted – Company Doesn’t Understand Why Anyone Would Expect Payments

This Does Not Affect Premiums Of Course – Continue Sending the Checks

Jefferson County, Alabama borrowed billions of dollars, in large part to build a municipal sewage treatment facility.  The project was fraught with difficulties, illegal activity and all sorts of other things, the result being that the county had to file for bankruptcy protection.  Still until recently the county was paying its debt service, but now that has been compromised.

Bondholders, who are owed more than $3 billion stemming from upgrades to the county's sewer system, have recently been getting smaller monthly payments from Jefferson County. Since the county took back control of the sewer system's finances last month in the wake of a bankruptcy-court ruling, it has deducted about $9 million in additional operating expenses.

But that shouldn’t hurt the bond holders, because the bonds were mostly insured.

As a result, the bondholders have turned to Syncora to make up the difference,

But (yes, whenever there is a “but” there is sometimes a second “but”) the insurance company may not have the money to pay the bond holders.

In court papers, Syncora said it agreed in 2004 to back more than $1.14 billion worth of Jefferson County sewer bonds. "Syncora believes that its very viability as a going concern may be threatened because of the heavy burden it must shoulder," the bond insurer's attorneys said in court documents, adding that the company has agreed to back nearly 80% of Jefferson County's sewer bondholder payments.

Now everyone should remember that Syncora did not insure the bonds out of the goodness of their heart, or to be a nice company and help out the county.  They provided insurance in return for a premium.  And now they are saying maybe they can’t live up to their end of the bargain.  Maybe they didn’t understand how insurance works, maybe they just thought they were getting all that nice premium income just for being a nice company.

Of course the matter is now back in the courts, and it may be that the bondholders will get their money and Syncora will be ok.  But if anyone is looking for a class of voters who feel that regulation of the financial industry, such as regulation of municipal bond insurers is not appropriate for government, well, don’t call on the Jefferson County bondholders insured by Syncora.  They would be just fine with government regulation that insured their insurance was real.