FASB Issues Rules to Toughen Bond Insurer Disclosures (Update2)
By Christine Richard
May 23 (Bloomberg) -- MBIA Inc., Ambac Financial Group Inc. and the rest of the bond insurance industry will have to disclose troubled securities they insured and set aside money for them sooner under new accounting rules.
The Financial Accounting Standards Board will require bond insurers to recognize a claim liability when there is evidence of credit deterioration, rather than waiting for a default, according to a statement today on the group's Web site. Bond insurers also will be required to disclose securities on their watch lists and provide more information about risk management.
The rules, which took almost three years to develop, are part of an effort by Norwalk, Connecticut-based FASB to standardize accounting among the bond insurers, which had been given discretion in the way they treat potential claims. The industry posted more than $13 billion in net losses in the past three quarters after boosting reserves for expected claims on securities backed by subprime mortgages and home-equity loans.
``It will be less of a wait-and-see approach,'' according to Russell Golden, Director of Technical Application and Implementation Activities at FASB. ``The increase in liabilities will be more commensurate with the increase in credit risk on the underlying exposure.''
MBIA fell 67 cents, or 8.3 percent, to $7.37 in New York Stock Exchange composite trading, after declining 89 percent in the past year. Ambac, down 97 percent in the past year, fell 17 cents, or 5 percent, to $3.22.
The rules, known as FASB Statement No. 163, Accounting for Financial Guarantee Insurance Contracts, are effective for fiscal years that begin after Dec. 15, FASB said. Expanded disclosure on risk management activities is required for the first reporting period after the release.
Jim McCarthy, a spokesman for MBIA, declined to comment on the rules. Vandana Sharma, a spokeswoman for Ambac, didn't return a call seeking comment.
Bond insurers have used different methods to reserve against claims, making comparisons across the industry difficult, FASB said. Some insurers set aside reserves based on a percentage of premiums received during a period while others reserved based on a drop in the credit ratings of specific bonds they back.
The statement also standardizes how bond insurers are to recognize premium revenue, said Golden.
``The current accounting system is confusing,'' James Broussard, the chairman of Citizens Against Higher Taxes, wrote in a letter dated June 12, 2007, in response to FASB's request for comments on an earlier draft. ``The sound financial health of the industry and uniform standards of demonstrating such health is vital to municipal finance.''
Bond insurers' shares have tumbled in part over concern that their losses will jeopardize their credit ratings. Security Capital Assurance Ltd. and CIFG Guaranty lost their AAA credit ratings and Armonk, New York-based MBIA and New York-based Ambac both raised capital to avert a downgrade by Moody's Investors Service and Standard & Poor's. Fitch Ratings cut both companies' insurance ratings to A+.
The change ``is particularly timely in light of recent concerns about the financial health of financial guarantee insurers, and will help bring about much needed transparency and comparability to financial statements,'' said Mark Trench, the project manager for the new rules.
To contact the reporter on this story: Christine Richard in New York at firstname.lastname@example.org. Last Updated: May 23, 2008 17:00 EDT http://www.bloomberg.com/apps/news?pid=20601087&sid=aAeoDX8PVi5M&refer=home
Okay, so let me get this straight. FASB wants servicers to let monoline insurers know when they are not properly crediting mortgage payments, sticking homeowners with unjustified fees, force placed insurance, mishandling property tax escrow and other mortgage servicing fraud that might be construed as "evidence of credit deterioration", all so monoliners can fatten up their "reserve against claims" so they will be able to pay out on insider trading credit default swaps. FASB has just insured that monoliners WILL GET DEPOSED and dragged into MSF cases. Oppressed homeowners deserve to know what monoliners knew and when. Not that I have any pity for them but when are financial guarantee insurers going to realize that they have been totally ripped off by servicers, egregious insider trading and complicit ratings agencies?