"Bond insurers put on a brave face in welcoming a new rival backed by Warren Buffett [WB], even as investors dumped their shares on fears that a well-financed competitor would cripple their beleagured business. ... Buffett's entry 'is a significant validation of the valuable role our industry plays in helping public entities issue debt,' said Williard Hill, chief marketing officer for MBIA. ... Buffett's company won't insure structured-finance products such as collateralized debt obligations or asset-backed securities which require more capital", WSJ, 29 December.
If monolines muni bond insurance business was profitable, how did it lower municipalities borrowing costs? This business required municipalities having stupid financial officers, and was supported by the rating agencies, like Moody's, 19% owned by WB. WB has a key point applying "moral hazard" to governments. Apply it to California, see my 28 December post. Better still, Uncle Sam. How will Unc repay the national debt? Easy, inflation; that's Helicopter Ben's job, to reduce the real value of Unc's debt. "But I thought it was to stabilize the economy". No. Did you ever hear of the "period of the peg", 1942-46? No? See my 17 September post. "The Humphrey-Hawkins bill said the Fed was to ... ". So?
I disagree with Hill; WB's entry into the muni bond insurance business shows it lacks economic value for bond issuers. Why? WB is smart. His company will only sell insurance that is expected to be profitable. Ex ante, municipalities buying this insurance will lose discounted present value. If not, how will WB profit? This is a zero-sum game. Mike Shedlock has a nice post on this at http://www.globaleconomicanalysis.blogspot.com/, 28 December.