10 years later: How the financial crisis reverberated into municipal bonds

October 22, 2018 11:23 AM

A timeline of some key events in the global financial crisis as they rippled into the municipal bond industry. Assembled from stories in the The Bond Buyer archives with help from material published by the Federal Reserve Bank of St. Louis.

July 24, 2007

A security guard stands outside the Countrywide Financial Corp. headquarters in Calabasas, California on Wednesday, October 20, 2004.

A security guard stands outside the Countrywide Financial Corp. Headquarters in Calabasas, Calif. on Wednesday, October 30, 2004. On Wednesday, Countrywide Financial Corp. released that its quartely earnings were down 47 percent. (Danny Moloshok/Bloomberg News)

DANNY MOLOSHOK

Trouble bubbles across the housing market. In its second-quarter report, mortgage giant Countrywide Financial says "softening home prices continued to affect many areas of the country and delinquencies and defaults continued to rise across all mortgage product categories as a result." The troubled company is sold to Bank of America six months later. Mortgage lenders New Century Financial and American Home Mortgage Investment Corp. filed for bankruptcy during 2007.

Dec. 19, 2007

The Standard & Poor's Financial Services LLC logo is displayed in front of the company's headquarters in New York, U.S., on Thursday, July 28, 2011. U.S. stocks slid, dragging the Standard & Poor's 500 Index lower for a fourth day, and six-month Treasury bills sank as lawmakers indicated they were no closer to an agreement to raise the debt ceiling. The dollar gained and commodities retreated. Photographer: Scott Eells/Bloomberg

Scott Eells/Bloomberg

The downgrade storm begins for the municipal bond insurance business. Following its industry review, Standard & Poor's cut ACA Financial Guaranty to CCC from A; assigned a negative outlook to AAA-rated Ambac Assurance Corp., MBIA Insurance Corp., and XL Capital Assurance Inc.; and placed AAA-rated Financial Guaranty Insurance Co. on negative credit watch.

January 18, 2008

The first brick falls from the wall of triple-A monoline bond insurance, as Fitch Ratings downgrades the Ambac Financial Group insurance financial strength rating to AA from AAA. For many years through 2007, about 50% of municipal bond volume had come with an insurance wrap, but with only one exception the insurers were undone by exposure to the mortgage market.

February 2008

The auction-rate securities market collapsed, with the rate of auction failures suddenly hitting 85%, according to a later Federal Reserve study. Until then, ARS auctions had rarely failed. This left issuers to pay high penalty rates while investors were unable to redeem instruments they had thought to be liquid.

March 24, 2008

Pedestrians walk by the headquarters of Bear Stearns Friday January 6, 2006 in New York. The four big New York-based securities firms that reported 2005 earnings last month -- Morgan Stanley, Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Bear Stearns Cos. -- said equity-trading revenue rose 22 percent to $14.3 billion, faster than either fixed income or investment banking. Photographer: Daniel Barry/Bloomberg News

Daniel Barry/Bloomberg News

The Federal Reserve Bank of New York agrees to finance JPMorgan Chase & Co.'s buyout of shaky Bear Stearns, "to bolster market liquidity and promote orderly market functioning." The deal brings an end to a major player in municipal bond underwriting.

May 6, 2008

UBS, cutting costs after reporting first-quarter losses of $11 billion, announces that it will exit the institutional municipal securities business. It returned to the muni market in 2017.

May 6, 2008

A Vallejo, California, ferry with the city's Mare Island in the background.

The city council in Vallejo, California, votes to file for Chapter 9 bankruptcy. "I've turned over every rock I could find," said Mayor Osby Davis. "We don't have the ability to pay our debts as they come due." The city would not emerge from bankruptcy until Aug. 2011, and was followed there in 2012 by the California cities of Stockton and San Bernardino.

June 5, 2018

An MBIA sign is positioned outside the MBIA Inc. headquarters in Armonk, New York, U.S., on Monday, Dec. 10, 2007

The MBIA headquarters in Armonk, N.Y. Monday, December 10, 2007. Shares of MBIA, the world's biggest bond insurer, soared as much as 27 percent after the company said it will sell $500 million of common stock to Warburg Pincus. The private equity firm will also backstop a rights offering of up to $500 million next year, Armonk, New York-based MBIA said today. Photographer: Craig Ruttle/Bloomberg News

Craig Ruttle/BLOOMBERG NEWS

Rating trouble finds bond insurer MBIA, as S&P Global Ratings downgrades it to AA from AAA, while also cutting Ambac to AA from AAA, citing the insurers' lack of new business prospects, poor financial flexibility, and the further decline of the residential mortgage market. All insurers but one eventually were dropped to junk.

Sept. 7, 2008

The Federal Housing Finance Agency places Fannie Mae and Freddie Mac in government conservatorship.

Sept. 15, 2008

Exterior of Bank of America Merrill Lynch building.

Bank of America announces that it will buy Merrill Lynch in a crisis-driven deal that combines two of the major players in municipal bond underwriting.

Sept. 15, 2008

FILE: A woman speaks on a cell phone inside the headquarters of Lehman Brothers Holdings Inc., in New York, U.S., on Sept. 15, 2008. Lehman Brothers, the fourth-largest U.S. investment bank, succumbed to the subprime mortgage crisis it helped create in the biggest bankruptcy filing in history. Photographer: Jeremy Bales/Bloomberg News

JEREMY BALES/BLOOMBERG NEWS

Lehman Brothers files for Chapter 11 bankruptcy.

Sept. 18, 2008

British banking giant Barclays PLC buys Lehman's broker-dealer unit, effectively taking over Lehman's place in municipal bond underwriting.

Sept. 21, 2008

The Marriner S. Eccles Federal Reserve building in Washington, D.C., in October 2012.

Andrew Harrer/Bloomberg

The Federal Reserve Board approved the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.

Sept. 29, 2008

Andrew Harrer/Bloomberg

The U.S. Treasury Department opened its Temporary Guarantee Program for Money Market Funds, after a panic when a money-market mutual fund called the Reserve Primary Fund "broke the buck," falling below $1 a share in net asset value amid losses on Lehman Brothers debt.

Nov. 21, 2008

The Moody's Investors Service Inc. logo is displayed outside of the company's headquarters in New York, U.S., on Tuesday, Feb. 21, 2012. Moody's Corp. is a credit rating, research, and risk analysis firm. Photographer: Scott Eells/Bloomberg

Scott Eells/Bloomberg

Moody's Investors Service downgraded to Aa3 from Aaa the insurance financial strength rating of Financial Security Assurance. FSA went on to be acquired by Assured Guaranty, one of two bond insurers writing new business today and the only one that predates the financial crisis.

Oct. 14, 2008

The US Treasury Department has appealed to the Sixth Circuit Court a pair of lawsuits with Ohio and Kentucky that have blocked the department from enforcing an ARPA provision that restricts the states from using the funds to offset tax cuts.

Treasury announced the Troubled Asset Relief Program, to encourage financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and support the economy.

Feb. 17, 2009

President Obama signs the American Recovery and Reinvestment Act, which eased a number of tax law restrictions for munis and created a new subsidized municipal taxable bond category, called Build America Bonds. BABs were popular with issuers but were not renewed when ARRA expired at the end of 2010.

July 21, 2010

Representative Barney Frank, a Democrat from Massachusetts and House Financial Services Committee chairman, left and Senator Christopher "Chris" Dodd, a Democrat from Connecticut and Senate Banking Committee chairman, arrive to speak at a news conference at the White House in Washington, D.C., U.S., on Wednesday, March 24, 2010. Dodd said President Barack Obama wants to move quickly on financial-reform legislation with the goal of getting a strong bill to sign this year. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Barney Frank; Christopher Dodd

Andrew Harrer/Bloomberg

President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. The law brought non-dealer, non-bank municipal advisors under a federal regulatory regime, subjected all MAs, including those at banks and dealers, to a fiduciary duty, and expanded the role of the Municipal Securities Rulemaking Board.