Yes that's insane.
But the blogger is also to blame here, he should not have used a Hotmail account to share such sensitive information.
IANAL and I'm not based in US but I would guess the only way to do this legally would be for MS to go to a law-enforcement agency, the agency would need to get a warrant and then the agency would be able to look into it, not MS itself.
contracts are not above the law, if a contracts stipulates something illegal it doesn't matter that both parties agreed to it
This seems to disagree with you, seems you are required to litigate to get your rights. The blogger was french also, so that probably has a bearing on what rights he has.
Does Microsoft disclose my personal information outside of Microsoft? You consent and agree that Microsoft may access, disclose, or preserve information associated with your use of the services, including (without limitation) your personal information and content, or information that Microsoft acquires about you through your use of the services (such as IP address or other third-party information) when Microsoft forms a good faith belief that doing so is necessary (a) to comply with applicable law or to respond to legal process from competent authorities; (b) to enforce this agreement or protect the rights or property of Microsoft or our customers; or (c) to help prevent a loss of life or serious physical injury to anyone.
Notice the bit about "protect the rights or property of Microsoft or our customers".
[0] http://windows.microsoft.com/en-us/windows-live/microsoft-se...