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Smart Money Betting on Bond Insurer Payoff: Street Whispers

But BTIG's Mark Palmer, one of the only sellside analysts to cover MBIA and Assured Guarantee, believes the reduced competition in muni bond insurance means there is room to make a profit notwithstanding the concerns raised by Buffett.

One obstacle to writing new business, however, is the low interest rate environment, which means many municipalities don't need insurance to lower the cost of issuing debt. Doing so is already dirt cheap. Assured Guarantee is also under the threat of a ratings downgrade from Moody's Investors Service that could hurt its ability to write new insurance. MBIA, meanwhile, needs to settle a long-running lawsuit with Bank of America that challenges the validity of a 2009 reorganization that split off MBIA's municipal bond insurance business from its exposure to frothy real estate loans.

Still, even if Assured Guarantee and MBIA can't get back into the muni bond underwriting game, that doesn't mean their shares can't rise substantially from here. Palmer argues Assured shares are worth at least $16 even if the company stops writing new insurance and merely allows its existing portfolio to run off. MBIA, meanwhile, will get a big pop if it wins a $2 billion settlement from Bank of America as Palmer and other analysts believe it will.

-- Written by Dan Freed in New York.

Follow this writer on Twitter.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.
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