Between the Lines: Bonds case is no homerun

Imagine paying someone fifty bucks to co-sign a credit card with you so you could save a hundred dollars in interest payments with the better terms his rating allows.

Now imagine that co-signer took your $50 and gambled it all away at the racetrack. Then couldn’t pay his bills so his credit rating sunk to what yours was before you enlisted his help - or worse.

Now imagine your credit card has a variable interest rate, so the amount you owe skyrockets overnight, thanks to your co-signer’s now-crappy credit rating.

And your fifty dollars is long gone. Now, insert the words “millions” for “fifty dollars,” “bond insurance company” for “co-signer,” “bond” for “credit card”, and “subprime mortgage market” for “racetrack” and that’s pretty much the basis for a lawsuit City Attorney Denise Herrera recently filed against five bond insurance companies. (Here is the Complaint: Download bond_complaint.pdf.)

Only San Francisco’s lawsuit also alleges that the bond insurers conspired to keep our credit rating low so we’d need the bond insurance in the first place.

The problem is while bond insurance companies clearly behaved in ways that were nasty, brutish, and (somehow) short, their actions were also probably lawful. Which means we need some new laws, but also means we ain’t winning this lawsuit. (At best, the insurers might pay some settlement to avoid the cost of a trial.) [Note: Congress is considering at least one bill related to this - H.R. 6308.]

And, much as the press release from the Office of Mayoral Hopeful Dennis Herrera would have us believe this is “his” case, the truth is that a law firmin Burlingame wrote the Complaint (and similar ones for Los Angeles, Oakland and Stockton) and the City Attorney’s office simply signed on. (Here are the other lawsuits: Download bond_complaint_los_angeles.pdf; Download bond_complaint_stockton.pdf; Download bond_complaint_oakland.pdf.)

On the bright side: we obviously haven’t become cynical about trusting third parties.

--Melissa

BONUS: We're actually not in that bad o' shape as a result of bond insurer douchebaggery. On Tuesday, at the Board's hearing on the economic crisis, Nadia Sesay from the Controller's Office of Public Finance, said that of our $9 billion in bond debt, $7.6 is fixed rate. And we've already dropped the bond insurance on our variable rate bonds.