Small Business Boomers

Muni Bond Insurance Bites Small Businesses

by jim on January 25th, 2008

For those of us who never took out a sub-prime loan or bought a securitized instrument back by sub-prime mortgages we are about to receive a bill.  It will come stealthily.  You will hardly know it as you get stuck for the excesses of the financial market.  It will come in the form of higher state and local taxes.  It will come because the insurance premiums on and the rates of return for municipal bonds will go up.  In the US and Canada local governments do rely heavily on the cheap money available through municipal bonds.

Doesn’t seem fair.  How could this happen?  Well, if you keep up with the financial news you will note that two firms, MBIA and the Ambac Financial Group, have been insuring purchasers of municipal bonds against default.  This lowers the risk of the bond and hence the cost to the borrower.  It’s a low margin business.  Seems folks at these two firms thought that it was time to participate in the higher returns seen in other areas of the financial market.  They decided to insure sub-prime securitized bonds.

As these bonds are defaulting MBIA and Ambac are being asked to make good on their insurance.  Seems they are having a lot of trouble doing so and repercussions of that are not good for pension funds and others who purchased bonds backed by sub-prime mortgages.  If either or both of these firms cannot restructure to cover their commitments (go out of business), the municipal bond market will take a hit in the pocket book which will be felt all the way down to the local taxpayers everywhere.

What does these mean for small businesses?

Immediately, expect to pay more in state and local taxes.  Long term, remember that even if you do everything right some idiot in a remote corner of the globe will make a mistake that will cost you money.  You can’t plan for everything.  So, try to keep from running so thin that those odd ball events that come out of nowhere sink your business.

 I’d be interested in hearing about other odd ball situations that have occurred to you or those about which you have heard.

Jim Norton

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