August 6, 2007 (LPAC)--The $2.4 trillion U.S. municipal bond market could be the next shoe to drop in the fallout from the subprime mortgage collapse. A lot of investors only hold municipal bonds because they are insured with an AAA rating. But some of the credit insurers who issue these AAA ratings have also insured some subprime mortgages, and have been hit by huge losses. Were one of these big credit insurers to default, the muni bonds would no longer be insured and would lose their AAA rating.

In that regard, two U.S. credit insurers, Mortgage Guaranty Investment Corp (MGIC) and Radian Group, warned last week that their combined investment of more than $1 billion in a subprime mortgage company, Credit-Based Asset Servicing and Securitization LLC (C-BASS), could be worthless, doomed by margin calls from lenders. This led Fitch to downgrade the rating of MGIC and put Radian's rating on a negative watch.