I respect Marty Whitman and Al Zucaro, though. I might take a position in one of them — maybe RAMR, because their book is so diversified.

1) “Are the bond insurers in deep trouble?” – the pattern of current insider buying across the industry suggests to me that insiders – the people who understand the business best – don’t think so. If they were worried about their careers, they wouldn’t be sinking extra capital into the stocks.

2) “Are they going to lose their ratings?” – if subprime default rates for 2004-2007 hit some astronomical figure like 30% or so within the next year or two, then this is definitely possible. But so much of the financial sector and the stock market as a whole would be in deep doodoo if that level of deterioration happened, so the risk/reward ratio for these stocks – which are off 70% at the same time current business conditions in terms of rates and market demand is very strong – is more attractive than most of the market. Also, the evidence of capital risk is from the ABX market pricing, not the operational results of these insurers (which is what the rating agencies consider for capitalization). Operationally, they have all increased their capital cushions over recent quarters. Supposedly Marty Whitman has a newish position in RDN, which strikes me as much more risky than ABK, which in turn is more risky than RAMR.

3) “If these companies lost their rating would this sort of business end?” – Doubtful. It would be an opportunity for new players with excess capital to enter a profitable line of work. They probably would think hard about buying the “brand names” and their work force to get started, but even if they didn’t, someone would pick up the slack.

4) “Would municipalities be hurt?” – Because of point 3), I think others would step in for new issues. But if the existing guarantors went out of business, there would be chaos in the municipal bond market and holders world be hurt, and perhaps reluctant to step up for new issues for some time.

5) “Do reinsurance patterns pose an extra risk?” – Speaking specifically of RAMR, my understanding is that they write yearly contracts stating the type and volume of business they are willing to take on, and then during the year they get “filled” with that type of business, where the fills are a small fraction (less than 10%) of some business from the primary of the agreed upon type. To the extent that the primaries made bad deals of that type, it would hurt RAMR, and if the primaries went out of business they would have to look for new customers or change their business model. But if other deals, or portfolio weightings of the primaries caused them to suffer losses, or doesn’t literally imply that RAMR does in the role of reinsurer. In fact, only about 5% of RAMR’s portfolio is in the U.S. residential area, and the sub-prime part is a small fraction of that. Also – from their conference call – their HELOC exposure is better quality than what the listing on their website made it out to be (it is BBB up through AAA and somewhat seasoned). SCA sounded very bullish as well on their recent conference call, but the composition of their portfolio is definitely more aggressive.