(snip)"Well so much for the idea that Ambac (ABK) and MBIA (MBI) will raise rates to dig themselves out of the hole they are in. Given that their "guarantees" are essentially worthless, why should anyone [that is preparing to issue new municipal bonds - sic] bother with insurance? That seems to be what a number of states have decided.
Ambac and and MBIA executives said "they could slow new business or issue debt to meet new ratings agency requirements". See Will Ambac and MBIA Survive? for further discussion.
But it looks like business is slowing already and I doubt that is a good sign for either company. As for issuing debt, who would want it in this environment? If anyone did what would the price be?"(snip)
On the one hand, this means that potential muni bond investors now need to be very careful in determining whether or not their new bond purchases are at risk of 'going up in smoke' if the issuing city budget goes bankrupt. This is not an 'idle' concern for many cities whose social welfare benefit / gov't employee retirement & health care / medicaid costs are rising rapidly, while at the same time businesses and their former taxpaying employees are leaving !
On the other hand, as Mish implies, if cities must sell new muni bonds to keep spending more than they are collecting in tax revenues, and those new muni bonds now carry full risk of default due to lack of insurance, the interest rates that these cities are going to have to pay in order to attract buyers for new muni bonds could be very attractive ! This is especially true for residents of high tax states like California or New York where muni bond interest earnings are exempt from say a 28% federal income tax plus say another 8% state income tax !
The Very Rich get even richer !



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