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There are many traps to letting an insurer bail a muni bond out

March 12, 2009

Analysis of:Buffett Warns Insured Muni Bonds Could Be Next Shoe to Drop | www.tradingmarkets.com

First, and foremost, munis are by and large extremely safe. No state general obligation has ever defaulted. Second, most insured bonds are for low rated revenue anticipation notes and bonds. Things like hospitals and transportation (tolls). School districts are another popular group. They expect to make payments based on revenue from operations. For the most part they do. The big question is whether insurers have enough reserves to swallow a sudden rash of failures. Due to the next bullet point below, that may not be such a problem. Third, for an issuer to let an insurer bail them out will translate into failure and no chance of acquiring any further funding, except by taxpayers in rare instances (some school districts). That stigma alone would put the issuer out of business since they obviously don't have the necessary cash flows to cover maturing bonds or probably even day-to-day operations.

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