And given the worsening outlook for government finances, the cost of insurance is rising. per your Buffett comment.

A recent (Feb 15) post by Nouriel Roubini at RGE Monitor indicates that he seems to be predicting a wave of muni bond defaults to come… and Warren Buffett demanding 150% to reinsure bond insurers’ muni portfolios seems to indicate he sees a risk as well as an opportunity.

There are two different issues here. One is that muni guarantees are fundamentally a ripoff, and I agree. But I don’t know how we get rid of them. Look at what happened in the auction rate securities market. Put the guarantee at risk and suddenly no one wants the paper.

Most of this is irrational, but muni bonds are the ultimate retail product, and you have quite a few unsophisticated buyers.

There is one segment of the market for which the insurance is a sensible product: entities that have sufficiently small fundraisings that buying a guarantee is cheaper than paying for a bond rating.

The second issue is “why should the munis suffer because of the SF business?” Well, aside from the fact that the regulators were dumb enough to let the insurers write it, the SF policyholders may be every bit as entitled to the full value of the insurer reserves as the muni holders. Remember, we operate under a society of law, You can’t change contracts just because you don’t like the outcome.

I haven’t gotten a clear reading on this issue. The prevailing opinion seems to be that the SF policyholders entered into their contracts assuming the monoline’s balance sheet was there for them. There appears to be no basis in the law for preferring one group of policyholders to another. The only way out may be that the SF product was written via a slightly different structure (the so-called transformers); the firms and regulators may be able to argue that that makes the SF policyholders subordinate to the ones who had their guarantees written directly. Again, not sure this argument holds water.

Finally, if you tank the enough bank equity by being cavalier about the SF guarantees, you hurt the economy. There is not a high road through this mess.

Ackman is no fool; he has been right on about the exposures/potentialities

However nothing from his proposal strips value from the holding companies. With his proposal if by some chance the insurers continue producing profits then that income will eventually be downstreamed to the holding companies.

Another and very interesting point that has been ignored by seemingly everyone is that unless MBI/ABK/Etc. file for bankruptcy, Ackman’s firm probably is toast. Long a motley group that includes Borders (BGP, -52% in 2007), Barnes & Noble (BKS, -13%), Sears (SHLD, -39%) and Target (TGT, -12%), Ackman was up 22% in 2007 primarily because he was short stock, long puts and long CDS in the insurer space. In fact, from what can be gleaned from commentary, including his own, Ackman appears to represent a substantial amount of the CDS exposure in the insurer space. Therefore, if MBI and ABK don’t implode, those CDS and derivative positions will be donuts and Ackman will be out of business . . . again. He NEEDS MBI and ABK to disappear or he will find himself on the wrong side of The Street.

Keep this in mind the next time you give any sort of academic credence to his commentary or proposals.

Major point here, which needs to be screamed from the rooftops.

Management of the monolines screwed up. A good bank/bad bank split up works only if management gets put into the bad bank part, and new management is brought in to manage the good bank.

Ackman’s scheme is nothing but a cover for the municipal insurance premiums to underwrite the SF toxic crap risk.

As Municipal Insurer writes safe business and generates excess profits, value can be upstreamedto the SF insurer to support SF claim obligations

Has anyone anywhere come up with an explanation of why Municipalities(the public) should bear the risk of SF crap? As this gets more play, people are going to wake up and realize that muni insurance is a racket, and municipalities are simply paying too much for insurance. Remember Gross’s comment few weeks back?

The municipalities would be better off with reclaiming the unearned premium, and purchasing new insurance.