Louisiana and a number of other issuers around the state plan to sue downgraded bond insurers, according to the office of the state treasurer.
The lawsuits would follow those of issuers such as New Orleans, which alleged in a suit filed last month in federal court that "mismanagement" and "greed" at Ambac Assurance Corp. cost the city millions of dollars when remarketing of its variable-rate demand obligations backed by the insurer failed.
"There are other issuers in the process of preparing the filing of litigation with regards to the insurers," said Whit Kling, director of the State Bond Commission.
The commission discussed the lawsuits at its meeting last Thursday night, Kling said. At that meeting, state Treasurer John Kennedy questioned why the city of Shreveport had not yet considered filing a lawsuit against CIFG Assurance NA, which insured $22 million of two series of bonds connected to the airport system the city sought approval to refund.
JPMorgan provided liquidity on the bonds and was forced to buy them back when remarketings failed following downgrades to CIFG. The city must now refinance at higher rates, and pay $3 million to terminate a swap on the original transaction, according to the state treasurer.
"This was all caused by the downgrade of your insurer," Kennedy said, according to an article in the Shreveport Times. "It's costing the taxpayers money."
When the attorney representing Shreveport at the meeting said the city hadn't considered suing, Kennedy pressed on.
"Why wouldn't you take recourse?" he asked.
The attorney later told the newspaper he would "investigate" the possibility of a lawsuit, but feared it could be a waste of the city's money.
"It's easy to get a judgment," said the attorney, Lad Shemwell. "It's sometimes harder to collect."
Shreveport Mayor Cedric Glover told the newspaper he had not heard of the suggestion. Neither Shemwell nor the city returned calls from The Bond Buyer seeking comment.
At the commission meeting, the city received preliminary approval to issue up to $10 million to refund $7.68 million of airport system revenue refunding bonds and up to $18.5 million to refund $14.54 million of airport system passenger facility charge revenue refunding bonds, according to the newspaper.
Kennedy has taken issue with bond insurers before. When the Louisiana Stadium and Exposition District issued $294.3 million of auction-rate debt in 2006 related to the Superdome in New Orleans, Financial Guaranty Insurance Co. charged a premium of $13 million to insure all but $56 million of it. Kennedy called the premium "unconscionable" at the time.
In addition to New Orleans, issuers in California have also filed suits against the bond insurers. The cities of Los Angeles and Stockton both filed charges in state superior court at the end of July, alleging six bond insurers sold them what became "worthless insurance." The cities said insurers conspired to maintain a dual rating system and that they never would have purchased insurance had they known of the companies' exposures to subprime loans.
San Diego and Oakland have also said they will consider filing lawsuits.