Muni Bond Insurance (for the short term)

Australia's Macquarie Group and Citadel's joint venture has received a license to insure municipal debt in New York. According to a Bloomberg report this morning:

Municipal and Infrastructure Assurance Corp., or MIAC, will guarantee only municipal bonds, according to a statement posted today on the Web site of the New York State Insurance Department.

The joint venture will avoid guarantees on securities backed by subprime mortgages and other types of debt that caused record losses at MBIA Inc. and Ambac Financial Group Inc., the world's largest bond insurers.

Now we can appreciate that having additional, alternative insurance options is helpful (and some of us may thank NY Insurance Superintendent Eric Dinallo for his efforts in this regard), but aren't we all missing the point?

Firstly, the monolines (Ambac, MBIA, FGIC, CIFG, Assured Guaranty, SCA/XL, etc.) didn't enter the subprime market because they expected to lose money there. They sought (and temporarily achieved) the benefits of diversification. It's not so easy, after all, to achieve a AAA rating when you're 100% exposed to a single sector or asset class.

Secondly, they went to RMBS world for the extra, um, what's the word - "zip." There wasn't too much money to be made insuring munis back then, and with so much competition, the business wasn't getting any better.

Now it's just a short-term cycle before the new players make it harder for the existing ones to survive, bringing down insurance premiums in the process.

And that's not to mention two key points:
(1) Munis can default (oh yes they can - just wait and see, or watch Southern California news)
(2) Australian banks (Macquarie Group) and hedge funds (Citadel) aren't exactly safe havens at this point in time