If they limit the tax exempt status of Muni's, borrowing rates will go up for the issuer. Muncipalities and States use AGO's insurance to lower rates. So lets say that a new issue Muni become 100% taxable, therefore a bond that previously paid out 3.25% now has to pay 4.25% because it lost it's federal tax free status. The issuer can reduce the rate it pays by making the bond insured. So pre tax status change the insured bond now has to pay 3.00% rather than 3.25% and post tax status change 4% rather than 4.25%, if AGO steps in. These past few years states have not sought out AGO's insurance because rates are so low and muni's were in big demand. If the tax status of muni's change muni's will lose their appeal and these states will find their cost to borrow money sky rocket. They will be seeking out AGO's insurance to reduce their borrowing costs. That is my logic. On a side note changing the tax status of muni's would be the dumbest thing that Congress could do. It would do exactly the opposite of it's intended purpose to put the screws to those horrible rich people. States would have to layoff people, increase real estate taxes, cut down on servicesetc. etc. etc,. to absorb these addtional borrowing costs. The Middle Class will be the ones bearing the brunt of the pain. So in summary I think if the tax status of muni's change it could be a very good thing for AGO and a bad thing for the country.Disclousure: I am still vey long.
Higher interest rates would have some benefits for AGO in terms of percentage of deals purchasing insurance. Good point.
Going "over the cliff" seems like a better alternative to many of the things they are talking about. I don't mind so much the limitation on tax-exempt interest or many of the other things they are talking about nearly as much as I hate the lack of stability in rules. There has always been some risk there but it is just getting out of control.