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Hurricane Ike made landfall early Saturday morning as a Category 2 storm near Galveston, Texas.  The size of the hurricane was gigantic, nearly filling up the entire Gulf of Mexico, extending edge to edge  from the Texas-Mexico border on one side to the Eastern border of Louisiana on the other.

Millions of residents are still without power and many areas remain flooded.  Reliant stadium, home to the Houston Texans, was also damaged, forcing the NFL to reschedule the game to November 9.

With much of the nation’s refinery capacity located in the region, gasoline prices are expected to hit $4 once again despite the recent fall in the price of crude oil.  It’s still not known when refining operations will begin again as much of the focus is on assessing the damage and clean up operations.

Initial estimates for insured property damages ranges from between 8 and 18 billion.  When it’s all said and done, Hurricane Ike may well rank as the third most expensive hurricane in U.S. history behind Andrew and Katrina.

Emergency crews have their hands full and some are saying it could be weeks before power is fully restored.  FEMA is also finding it difficult to deliver relief supplies to the most devastated areas.

For now the 2 million residents who evacuated from Ike’s path are being told to stay away and it could be some time before they are allowed to come back.

Even if bond insurers finally get their house in order, they may soon find themselves in a much smaller market to operate with.  According to Bloomberg, Moody’s Investor Service will soon be moving to a single rating scale for corporate and municipal entities with the other ratings agencies soon to follow suit.

Moody’s Investors Service is about to tell as many as 29,000 U.S. state and local government borrowers that they have higher credit ratings. That doesn’t mean taxpayers will enjoy lower borrowing costs anytime soon.

Next month Moody’s will start changing how it assesses tax- exempt bonds, a move that will boost ratings by an average of one to two grades for cities and towns. Even with the expected increases, a tax-exempt borrower currently rated A is being charged an extra $6 million in annual interest to sell $1 billion of bonds, up from about $2 million a year ago, according to Lehman Brothers Holdings Inc. data compiled by Bloomberg.

With higher ratings, some municipalities may no longer need bond insurance and those that would still benefit from purchasing it will pay lower costs than they did a year ago.  It’s a smaller ocean that insurers will try to get back into after the fallout of the subprime collapse finally settles.

The industry may survive by expanding into other markets but it will lose much of the easy money that was the hallmark of the municipal sector for decades.  With their history of low default rates, they hardly ever had to make any pay outs.

A number of companies are moving to form separate municipal units that would start with top credit ratings but it may be too little too late.  The ill fated decision of insurers to expand into the residential mortgage market has irrevocably changed the landscape in the municipal bond insurance sector.

With many of the largest bond insurers having been stripped of their AAA ratings it is a bleak time for the bond insurance sector.  Hit hard by subprime collapse and huge losses from insuring Mortgage Backed Securities, bond insurers are now trying to get back into the game.

Last week, Ambac Financial and Assured Guaranty announced plans to form independent municipal bond insurance units, separate from the main company that would likely start fresh with a top credit rating.  Right now these companies can’t book any new business with their low ratings.

We will probably see more companies following suit but the big question is whether there will be demand for their services.  All there has been a lot of talk or removing the double standard between corporate and municipal debt ratings that is going to take time.

While municipal debt has a history of low default rates, there are a lot of local governments that have been hurt real badly when the auction rate bond market collapsed in February because the companies that insured them had their credit ratings drop.  Consider Jefferson County Alabama, they are on the brink of bankruptcy because of this mess through no fault of their own.

Despite the auction rate settlement that was reached with investment banks, many municipalities still need to refinance hundreds of billions in debt at higher interest rates.  So there is demand out there for bond insurance despite all the hard feelings and mistrust against insurers.

But after all that has happened, it would come to no surprise, if we saw municipal default rates rise as local governments struggle with the higher borrowing costs.  What was once a steady profitable sector before insurers delved into guaranteeing collateralized debt, may not be as such in the future.