Buffett: Bond Insurance - I'm out; Moody's: Muni Bonds = Junk?

Warren Buffet has just divested itself of local govt. bond insurance.  "Credit-Default Swaps" became infamous as the primary cause of the 2008 crash but all they are is a form of insurance on an investment.  The problem was when insurer's couldn't pay the claims.

"“A decision by Warren Buffett's Berkshire Hathaway Inc. to end a large wager on the municipal-bond market is deepening questions from some investors about the risks of buying debt issued by cities, states and other public entities. The Omaha, Neb., company recently terminated credit-default swaps insuring $8.25 billion of municipal debt. The termination, disclosed in a quarterly filing with regulators this month, ended five years early a bullish bet that Mr. Buffett made before the financial crisis that more than a dozen U.S. states would keep paying their bills on time, according to a person familiar with the transaction. The insurance-like contracts, which required Berkshire to pay in the event of bond defaults, were originally purchased by Lehman Brothers Holdings Inc. in 2007, more than a year before the Wall Street firm filed for bankruptcy, the person said.”"

http://online.wsj.com/article/SB10000872396390443855804577601413630604118.html

The recent CA city bankruptcies have got the municipal bond market worried, especially with LA rumored to be considering bankruptcy.  This is bad.  If cities can't borrow money because bond buyers don't trust them to pay their debts, then capital projects like fire stations, city halls,  and libraries won't get done.  This nation lives on credit - if everyone and every city and county had to pay cash for everything economic activity would freeze.  That is essentially what happened in the Lehman Bros. crisis which precipitated the 2008 crash.  Govts world-wide started backing up every bank and insurance co. on the ropes because of the fear of a complete credit freeze.  This current situation isn't that bad (yet), but it isn't good.

Moody's is thinking about downgrading all California debt or at least selectively downgrading some.
http://bigstory.ap.org/article/credit-agency-sees-greater-chance-municipal-bankruptcies-risk-bond-defaults-calif

LA bankruptcy coming?
http://ivn.us/2012/08/14/los-angeles-bankruptcy-may-be-coming/