The city of Los Angeles is suing six bond insurers for not revealing the extent of their involvement in the subprime meltdown that had an adverse effect on the cost of municipal bonds.
Los Angeles City Attorney Rocky Delgadillo filed two separate suits, one against the bond insurers and the other against banks. The suit against bond insurers alleges their involvement with the subprime mortgages should have been revealed to municipalities and their reckless actions increased the cost to taxpayers for the bonds.
The suit names Ambac Financial, MBIA Inc., XL Capital Assurance Ltd. (which is not a member of XL Capital in Bermuda), ACA Financial Guaranty Corp., Financial Guaranty Insurance Company, and CIFG Assurance North America Inc.
The suit also names Jason Kissane, head of MBIA's office in San Francisco; Neil Pack, a managing director and head of the U.S. public finance for CIFG in San Francisco; and up to 50 other yet to be identified defendants who were involved in the alleged scheme.
In the suit, filed in Superior Court of the State of California in Los Angeles, the city alleges that the insurers failed to inform the municipalities about their involvement in insuring subprime mortgages that has led to the housing industry collapse.
The mortgages were written to individuals who were unable to pay the loans once their adjustable rates began to increase, leading to an unprecedented round of foreclosures not seen since the Great Depression of the 1930s.
The suit contends that if the buyers were aware of the insurers' involvement in insuring the subprime loans, the municipalities "would not have purchased bond insurance that became basically worthless."
The suit charges the insurers with fraud and deceit, breach of the covenant of good faith and fair dealing, breach of contract, negligent misrepresentation, negligence, and violations of California's anti-trust laws.
The suit contends insurers and rating agencies created a dual rating system that unfairly increased bond insurance costs for municipalities "because it was unfairly rated lower than corporate entities."
The city contends that it is obligated to purchase insurance only from "triple-A" insurers and because of this, municipalities are charged more for their coverage under the dual system insurers employ.
"Cities are given less than [triple-A], even though cities historically do not default," the Los Angeles City Attorney said in a statement.
"This dual credit rating scheme is maintained by bond insurers to take advantage of the taxpayers by compelling cities to purchase unnecessary bond insurance," said Mr. Delgadillo.
"Bond insurers' cynical use of this discriminatory credit rating system and inexcusable failure to disclose their high-risk investments in the subprime market also violates California's anti-trust laws and common law," he added.
Representatives from Ambac, MBIA, XL Capital Assurance and CIFG said their companies do not comment on ongoing litigation. ACA and Financial Guaranty did not return a request for comment.
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