The Subprime Financial Crisis and the Monoline Insurers
One spillover from the subprime financial crisis was a hit to the monoline insurers, with spillover effects in the municipal bond market. Unfortunately for the monoline insurers, they not only insured municipal bonds, but also debt securities backed by subprime mortgages. With rising defaults on these mortgages, monoline insurers started to take big losses, resulting in credit downgrades from their AAA status. This weakened the value of their insurance guarantees, not only on subprime securities but on municipal securities as well. As the subprime crisis got into full swing, the markets took the view that monoline insurance was not worth much and so municipal bonds began to trade at lower prices based solely on the municipality’s credit rating. The result was that state and local governments now found their interest costs rising. They were hit by a double whammy from the subprime financial crisis of higher borrowing costs and lower tax revenues because of their state’s weaker economies. The result was not only weaker state and local finances, but cutbacks in spending for roads, schools, and hospitals.