Catastrophe bonds

Until last September, I thought catastrophe bonds – sort of re-insurance for catastrophic events – were a neat free market alternative to under-funded state recovery funds and weak insurance companies. They’re still selling and in fact are at 2009 highs today because there have been no hurricanes - yet. Traders are so short-sighted that if August 15 th passes without a storm they assume it will never happen. Ana, Bill and Claudette are about to prove their optimism wrong but never mind – the real issue I see is, who is issuing these bonds and do they have the financial wherewithal to back them? AIG taught us that there often is no substance behind these companies and now I worry that, should a major hurricane hit Miami and cause, say, $200 billion in damage, we taxpayers will be faced once again with a “too big to fail” situation and get screwed again. Not that that’s likely, of course.

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