Can Municipalities Wrap Themselves?

 |  Includes: MCO, MLN, MUB, SMB, SPGI, TFI
by: Felix Salmon

The Prince of Wall Street has an intriguing idea: why can't municipalities set up their own monoline?

Why do we not see the big issuers of municipal bonds i.e. the Port Authority of New York and New Jersey, the State of California, tollways, etc., forming a coop together to issue insurance. This coop would take the form of a public "utility". Why give all the rents to Warren Buffet's insurer or another insurer when the issuers can effectively cut the middle man out. In theory, if we could get the top 100 issuers of municipal bonds to contribute capital to an entity controlled by the contributors that entity could then provide insurance to the members at a lower cost than private insurers. The contributions would serve as the assets that would insure the bonds from default. The effective borrowing costs for issuers would have to decline under this cooperative self-insurance scheme.

This makes a certain amount of sense to me. Take the billions of dollars that municipalities historically gave to the monolines, and give it instead to a new insurer which exists only to wrap the bonds of its municipal owners. There might need to be some loans from the bigger states to give it an adequate capital base to begin with, but those could probably be repaid quite quickly through the new entity's profits.

I can see some possible regulatory problems here: the relationship of the new monoline with the various state and federal insurance regulators would have to result from some rather delicate negotiations. But it's still an idea worth considering.