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Abstract: 

Third-party private municipal bond insurance companies once insured more than 50% of the bonds issued annually in the municipal bond market. Now the major bond insurers are teetering on the edge of extinction due to their portfolios—exposure to tainted mortgage-backed investments. This article discusses the role that bond insurance plays in the municipal bond market and comments on the impact that the demise of the bond insurance industry will have on bond buyers, issuers, and insurers in the municipal bond market. Improved transparency and disclosure may mitigate the need for bond insurance. In the short term, many governments will see credit shortages and higher interest costs. In the long term, the markets will adapt by rebuilding the bond insurance industry and/ or by attracting into the market bond buyers who are less risk averse.

Keywords: Bond insurance; credit enhancement; information asymmetry.

Affiliations:  1: University of Kentucky Martin School of Public Policy and Administration.