The collapse of the municipal bond insurance market: How did we get here and is there life for the monoline industry beyond the great recession?

This paper addresses risk exposures in insured portfolios of monoline firms for 1995-2010. US public finance exposures decreased dramatically during the period, while US structured finance and international finance exposures grew significantly. By 2007, combined non-public finance insured exposures were from 30% to over 80% of financial guaranty portfolios. Regulatory and statutory requirements, however, did not change as rapidly. Capital reserve requirements were adequate to withstand the public finance default rates but not the structured risks in asset-backed debt, CDOs or CDSs. As a result, the monoline industry today is a one-and-a-half-firm business with uncertain future. Municipal bond market insurance penetration was about 5% in 2010 guarantying about $27 billion in new money issued. This is a far smaller industry than the one that existed in 2007 prior to the Great Recession.