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JP Morgan and other banks on the losing side of the trade are now whining to Sifma and the American Securitization Forum that it’s not fair they lost money on their speculation that the mortgage bonds would default.

So-called junk-graded companies worldwide defaulted ontheir bonds at a rate of 5.2 percent in February, the ratingsfirm said in a separate report last week, as $1.2 trillion ofbank losses combined with a global recession hamper borrowers’finances.

If housing prices keep falling, more mortgage bonds will default and the liability attached to the credit default swaps based upon them will still be in the trillions or even tens of trillions.

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Complaints also came from brokers from Bear Stearns and others who helped sell him the credit default swaps on the toxic tranches of mortgage bonds, as well as the most troubled sub-prime lenders and banks holding the troubled securities.

“By its own account, Kingsway came close to defaulting on its bonds during the most recent quarter, and only the disposal of its Lincoln General unit via a "donation" to a group of charities likely prevented more severe financial consequences,” said RBC Dominion’s report.

“In the worst case, an adverse court ruling could reverse the transaction (which may put the bonds back in default) and/or require a capital injection to Lincoln General,” said RBC Dominion’s analysts.

Basically, their business model of using a AAA rating to guarantee bonds (a sort of credit default insurance) was rendered non-viable by the credit crunch.

Throw in munis’ microscopic default rates, and you’ve got an ideal landing spot for investors weary of the stock market roller coaster… As we said, the default rate on munis is minuscule, especially for GOs, water-and-sewer revenue bonds, and the other plain-vanilla offerings that make up the majority of the muni market.

Even triple-B-rated munis – the lowest rung of investment grade – have a default rate of only 0.06 percent… Over the years, this incongruity has fueled the growth of Ambac, MBIA and other bond insurance companies.