.crazylegs..

Bond Insurer Break-Up: Beware Unintended Consequences

"But can't we withstand a few defaults in order to strip the friction of insurance out of the industry? All this money paid out to bond insurers over the last 30 years is largely a tax on issuing bonds that don't really need the enhancement to begin with."

If the cost of the insurance wrapper is less than the amount the municipality saves in interest paid with versus without the insurance, this is a clear benefit to the municipality. It is not friction if an A rated issuer can get a AAA insurance wrapper and pay less to fund themselves on a net basis.

There is a place for the muni bond insurers if they stick to their core business. These guys got into trouble only when they wrapped their insurance around structures they could not peer through and understand exactly who the borrowers were to correctly price those risks.