Massachusetts' top securities regulator yesterday said he had issued subpoenas to a pair of municipal bond insurers, seeking information on how much the firms disclosed to cities and towns about their exposure to mortgage-related investments that have recently plunged in value.
Secretary of State William Galvin sent subpoenas last week to New York-based Ambac Financial Group Inc. and Armonk, N.Y.-based MBIA Inc. He is seeking lists of public bonds in Massachusetts that the firms agreed to back by insuring repayment, and related documents. He gave the firms until Feb. 1 to turn over the documents.
Phone messages seeking comment from Ambac and MBIA were not immediately returned.
The two bond insurers are under review by ratings agencies for possible downgrades due to their exposure to complex investments known as collateralized debt obligations that are backed by home mortgages.
"This office wants to know when and if MBIA and Ambac disclosed to bond issuers - the cities, towns, districts, and other public authorities - that their financial condition as an insurer was being severely impacted as a result of their involvement with these highly risky securities," Galvin said.
Galvin questioned whether Massachusetts cities and towns would have relied on Ambac and MBIA for financial guarantees to ensure bond investors are repaid had the governments known about the firms' guarantees of CDOs.
If cities and towns are unable to repay bond investors, insurers repay the principal and interest - a guarantee that comes at a premium price if the insurer boasts a strong rating from outside agencies that assess financial strength.
"Cities and towns rely on these companies in order to quickly and cost-effectively raise money for such needs as public safety, buildings, and schools," Galvin said. "The market relies on the insurance provided by these companies to price the bonds and to ensure that investors get paid in the event of a default. If the credit quality of these companies comes into question, the impact on cities and towns is enormous."
Last week, Fitch cut Ambac's rating to AA, and rival ratings agencies have indicated they are reviewing whether to follow suit in dropping Ambac's top-notch AAA rating.
On Tuesday, Ambac said it was discussing ways to boost its reserves. Ambac reported a loss of $3.26 billion in the fourth quarter.
Yesterday, shares of Ambac and MBIA rose sharply on news that regulators were meeting with bond insurers and could come up with a government assistance plan.