California Stops Insuring State's Municipal Bonds

The country's largest issuer of municipal bonds, the state of California, has decided to stop using municipal-bond insurance, a huge blow to the struggling industry, CNBC has learned.

AP

"In the current market--and given the condition of the bond insurers--it makes no sense," Tom Dresslar, the Director of Communication for California State Treasurers Office, told CNBC. "There's no value to the taxpayer."

From 2003 through 2007, California spent $102 million to insure $9 billion in California General Obligation Bonds. This year, the state has spent no money on muni bond insurance for the two issues it has floated: a $3.3B economic recovery bond, and the $1.75B GO issue that will price this Wednesday.

"Bond insurance has no value," Mr. Dresslar said.

The state is not soliciting bond insurers for business and doesnt know if and when it will, Mr. Dresslar said.

The decision couldn't come at a worse time for bond insurers, which are struggling to keep their crucial Triple A ratings after getting hit with billions of dollars of losses from insuring subprime related debt.

MBIA , the largest bond insurer, has recently raised more then $2.5 billion of capital from investors to help offset losses and has taken other measures to boost capital, such as eliminating its dividend.

Another big bond insurer, Ambac , is working with banks to raise enough capital to satisfy the rating agencies and keep its triple A rating.

© 2008 CNBC.com