School Districts and Municipalities Receive Notice of Order to Show Cause Concerning FGIC Municipal Bond Insurer

By David W. Oakes

School districts in New York state, and municipalities as well, have received copies of  a “Notice To Show Cause” from the Supreme Court of New York concerning municipal bond insurer FGIC (Financial Guaranty Insurance Company).  The districts and municipalities need not take any action in response to the Notice.

The Court sent copies of the Notice to districts and municipalities whose bonds were insured by FGIC.  FGIC involved itself in also insuring mortgage-backed securities.  As a result, FGIC suffered huge losses which compromised FGIC’s financial status.  FGIC, like many insurance companies, is part of a corporate family.  Its parent company, FCIC Corporation, has filed for federal bankruptcy.  In the meantime, the state of New York has determined that subsidiary FGIC needs to be under similar control directly.  The Notice of Order to Show Cause is notification that the state of New York through the Superintendent of Financial Services of the State of New York is seeking to have FGIC placed into “Rehabilitation” under the Superintendent’s control.  “Rehabilitation” is similar to bankruptcy proceedings.

A district or municipality which receives the Notice need not take any action.  This matter does not affect the districts or municipalities.  Rather, it affects the holders of bonds that were insured by FGIC.  Districts and municipalities have no control over the bondholders and most likely do not even know who they are because of the ways in which municipal bonds are sold and registered.

Although districts and municipalities need not take any action regarding the Notice, if a district or municipality has any question about the proceedings or any subsequent notices that may be issued, they should consult with their school district or municipal attorney.