The chairman of a House panel has launched an investigation of the bond insurance industry and has asked federal regulators whether legislative or regulatory reforms are needed as rating downgrades of two triple-A insurers followed their disclosure of exposure to subprime mortgage debt.
“I am especially concerned about the implications for state and local governments that rely on bond insurance when putting together deals to pay for roads, schools, and other construction projects,” Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services Committee’s capital markets panel, said in almost-identical letters sent to Securities and Exchange Commission chairman Christopher Cox, Federal Reserve Board chairman Ben Bernanke, and six other federal and state regulators.
“Any increase in the perceived risks in bond insurers or decrease in competition seems likely to raise borrowing costs and slow spending on public infrastructure needs,” he said in the letters, which were dated Jan. 23 but not publicly released until yesterday.
Kanjorski asked the regulators, by Feb. 1, to provide him with information on the problems faced by the bond insurance industry, the implications of these problems for market participants and the economy, the steps being taken to monitor developments and protect investors, and the need for new statutory or regulatory tools.
He asked three state insurance regulators about the possibility of creating a guarantee fund for bond insurers, like state funds that exist for life and health insurers and property and casualty insurers.
Kanjorski said his panel will hold hearings on the insurance industry and these issues next month.
The letters come as Fitch Ratings yesterday downgraded the rating of financial guaranty insurer XL Capital Assurance from to A from AAA after it’s parent, Security Capital Assurance Ltd., said it would not raise new capital to bolster it against its subprime exposure. Last Friday, Fitch downgraded the insurer financial strength rating of Ambac Assurance Corp. to AA from AAA, after it announced it would abandon it’s capital raising plan. Standard & Poor’s last month dropped the smallest insurer, ACA Financial Guaranty Corp., to CCC from A. Moody’s Investors Service has put both Ambac and MBIA Insurance Corp. on watch for a possible downgrade.
The ratings downgrades have raised concerns about the ongoing viability of bond insurers and implications of the actual and potential rating downgrades for all participants in the financial markets, Kanjorski told the regulators.
In a release accompanying the letters, Kanjorski said, “In recent years, many bond insurers moved form their core business of insuring municipal debt and began guaranteeing risky, complex structured finance products backed by subprime mortgages. The current problems in the subprime mortgage market have resulted in downgrades and losses for several bond insurers and have the potential to spread to other areas of our financial markets. Downgrades could force a sell-off of pension fund assets, and could also result in higher borrowing costs for municipal construction and financing efforts. We need to act promptly to understand these developments.”
