FDIC chairman sees strength in muni bonds

WASHINGTON (Reuters) - Bond insurers may be threatened by complex mortgage securities but their core business of standing behind municipal bonds remained strong, a top U.S. banking regulator said on Tuesday.

Bond insurers, like MBIA Inc (MBI.N: Quote, Profile, Research, Stock Buzz) and Ambac Financial Group Inc (ABK.N: Quote, Profile, Research, Stock Buzz), have struggled with rising claims and big write offs after venturing into the higher-profit world of guaranteeing bonds backed by consumer debt, including subprime mortgages.

Federal Deposit Insurance Corp Chairman Sheila Bair told the Reuters Regulation Summit that her agency was evaluating the possible impact on banks.

She said there was still strength in the state-regulated insurers' core business of guaranteeing bonds issued by cities and states.

"Unlike the CDO (collateralized debt obligation) market, where there's obviously issues, the quality of the securities in the muni bond market is really strong," Bair said.

Even if bond insurers see more rating downgrades, she said she expects municipal bonds will remain strong.

Bond insurers are looking to raise capital to protect their credit ratings as any downgrades could force investors to sell billions of dollars of bonds, lifting borrowing costs for consumers, city governments and others.

Bair said on Tuesday that she believes bond insurers were seduced by the supposed safety of mortgage investments.

"You can't fault them," Bair said. "Why were money market funds buying this stuff? Everyone was relying on the rating, and no one was looking at what is behind the ratings. (They said,) 'Oh they're mortgages, they must be safe.'"  Continued...