Financial Guarantee Insurance

  • Monolines
  • Bond Insurers
  • FRB - Federal Reserve Board
  • NAIC - Financial Guarantee Study Group
    • Model Financial Guarantee Insurance Act
  • SEC - Securities and Exchange Commission
  • The financial meltdown that began in 2007 revealed problems with financial guarantee insurers and regulation of these insurers. 

2011 - JIR / NAIC - Financial Guarantee Insurance and Failures in Risk Management, by Pamela Peterson Drake and Faith Roberts Neale - 49p

  • (p84) - The current level of state regulation does not provide for safe and sound operation of financial guarantee insurers. 

1987 0828 - SEC - Report by the United States Securities and Exchange Commission on the Financial Guarantee Market : The Use of the Exemption in Section 3 (a) (2) of the Securities Act of 1933 for Securities Guaranteed by Banks and the Use of Insurance Policies to Guarantee Debt Securities, Securities and Exchange Commission - 131p

  • 1987 0828 - SEC - Report by the United States Securities and Exchange Commission on the Financial Guarantee Market : The Use of the Exemption in Section 3 (a) (2) of the Securities Act of 1933 for Securities Guaranteed by Banks and the Use of Insurance Policies to Guarantee Debt Securities, Securities and Exchange Commission - 131p
  • 1988 02 - FRB-NY - Quarterly Review - Estimating the Funding Gap of the Pension Benefit Guarantee Corporation (PBGC), by Beverly Hirtle, Federal Reserve Bank of New York - [16p - link to PDF]
  • (p23) - Well, I think that—as you said, what happened is they moved from municipal securities into mortgage-backed securities, thinking that since, among other things, housing prices had never gone down in the United States, it should not be a problem.
    • To a large degree it has really been the market response that has taken care of the problem in the sense that people are not really trusting the financial guarantee insurers anymore.
    • I think it is questionable whether the market needs this kind of guarantee insurance or whether it was just sort of a historical accident that it still existed. 

--  Baird Webel, CRS, Specialist in Financial Economics, Congressional Research Service 

2011 0914 - GOV (Senate-Banking/SII) - Emerging Issues in Insurance Regulation, Jack Reed (D-RI)  ---  [BonkNote]  

  • 1987 0828 - SEC - Report by the United States Securities and Exchange Commission on the Financial Guarantee Market : The Use of the Exemption in Section 3 (a) (2) of the Securities Act of 1933 for Securities Guaranteed by Banks and the Use of Insurance Policies to Guarantee Debt Securities, Securities and Exchange Commission - 131p
    • (p6-7) - Domestic banks participate in the financial guarantee market primarily through the use of standby letters of credit. 8/  These standby letters of credit are considered by some to be functionally equivalent to insurance policies. 9/
      • One source estimated that, in 1984, United States commercial banks issued standby letters of credit guaranteeing total debt of $146 billion, up from $46.8 billion in 1980. 101 Bank fees for standby letters of credit in 1984 were estimated to be $730 million. 10/ 
    • (p7) - Foreign banks also have entered the financial guarantee market. According to one estimate, in mid-1985, United States branches and agencies of foreign banks had $20.7 billion in standby letters of credit outstanding. 12/
      • More recently, it was estimated that foreign banks had increased their share of the domestic market for standby letters of credit to over 50%. 13/
    • (p7) - III. TREATMENT OF FINANCIAL GUARANTEES UNDER THE SECURITIES ACT OF 1933 
    • (p39) - While GICs are similar to financial guarantee insurance in that both enhance the credit rating of the security, thereby lowering the cost of financing for the issuer, a GIC is not a true guarantee.
      • A GIC is a primary obligation to make payments, whereas a guarantee involves a secondary obligation which arises only upon the default of the primary obligor. 105/
      • Because of this, GICs have been likened to a strong commercial enterprise underlying a municipal bond issue. 106/
    • (p39) - State Regulation
    • (p41-42) - In 1985, the NAIC created a study group on financial guarantee insurance.
      • Because of the rapid growth of financial guarantee insurance, the apparent risk of the industry, and the inadequacy of current legislation, the NAIC perceived a need to develop legislation to avert potential crises.117/
      • In 1986, the study group submitted a proposed Model Financial Guarantee Insurance Act to the NAIC membership, which adopted the Model Act on June 12, 1986.
      • ⇒  117/ NAIC Proc. - 1986, Vol. II at were concerned about the lack and type of obligations being at 16 (statement of Corcoran, 209. For example, regulators of information on the amount guaranteed. Commission hearing at 16 (Statement of Corcoran chairman, of the study group).
    • (p42-43) - The Model Act defines financial guarantee insurance to include guarantees of indebtedness on which principal and interest may be guaranteed. 121/
      • Several insurance products, including traditional surety, residual value, mortgage guaranty, credit unemployment insurance,122/ and guaranteed investment contracts, are not treated as financial guarantee insurance under the Act, although they may technically fall within the definition of financial guarantee insurance.123/
    • (p46) - There is also a concern that, if the guaranty fund had to pay every investor in the event of a bond default, the cost to the fund could be enormous. 137/
      • 137/ Id. at 21-22. Also, other insurance companies, which have chosen not to take the risks of financial guarantee insurance, have stated that they do not want to pay insolvency fund assessments on the covered losses of those who choose to take the risks. NAIC Proc. - 1986, Vol. I at 162 (statement of William J. Murray, Vice President and Counsel, Chubb & Son Inc. ) 
    • (p84) - The current level of state regulation does not provide for safe and sound operation of financial guarantee insurers.