The federal government could help jump-start the municipal market by letting bond insurers participate in the $700 billion Troubled Asset Relief Program, New York insurance superintendent Eric Dinallo said yesterday.
It would be "very logical to think about" the federal government dedicating between $10 billion and $20 billion as a "backstop" for the bond insurers, Dinallo said. He made the comments yesterday morning during an interview on CNBC, with New York Gov. David Paterson serving as guest host.
"That, in my mind, would be one of the cheapest, most quick ways to unlock the municipal bond market," Dinallo said.
Dinallo noted how backing from a triple-A guarantor had in the past allowed insured municipal bonds to trade like a commodities. Insurance penetration has dwindled as bond insurers have lost their triple-A ratings, reducing demand for the product and contracting the capacity available.
State regulators and financial guaranty executives plan to meet to discuss submitting an industry-wide response to the government's request for proposal to the bailout plan today. The bond insurers could take steps such as asking the government to buy assets from their guaranteed investment contract portfolios or allow them to help out with the government's guarantee program.
Analysts, though, said questions remain about how the Treasury's plans could aid bond insurers. Fox-Pitt Kelton analysts Gary Ransom and Amit Kumar wrote in a research report yesterday that the TARP plan will likely help the bond insurance industry only indirectly, by improving the credit markets and providing support to mortgages. Municipal Market Advisors managing director Matt Fabian said even if the insurers get support, it's unclear how much it could help.
"We see any federal aid to the insurers as unlikely; there are dozens of interest groups requesting assistance and the economic impact of a Treasury subsidy for the insurers (or purchase of insured risks) is questionable," Fabian wrote in his weekly report. "We do not expect the currently downgraded companies can regain market confidence in any event and all the insurers will face worsening credit and rating pressure as the credit crisis spreads to other structured finance asset classes."
Elsewhere, Financial Security Assurance Inc. parent Dexia SA said it would keep in place the $5 billion unsecured line of credit it offered its bond insurer subsidiary earlier in the year. Dexia had suggested last month it would convert the line into a repo facility after European governments worked with existing shareholder to inject $9.2 billion in capital into Dexia, the first of two moves they made to try to stabilize the bank.
The Board of Directors also told new Dexia chief executive officer Pierre Mariani he had a "mandate ... to explore all the options which might enable the specific risk of FSA's activity to be reduced," Dexia said in a statement. FSA in August announced plans to exit the structured products business to focus on public finance.
FSA is one of the insurers that benefited in the first half of the year from the turmoil in the market. Along with Berkshire Hathaway Assurance Corp. and Assured Guaranty Corp., FSA saw strong pricing and secondary market business as a result of decreased competition in the first half of the year, according to a Standard & Poor's report released last week.
FSA increased its U.S. public finance profitability index to 9.63% through June 30 from 5.10% through the same date last year, and Assured Guaranty increased its profitability index to 7.32% from 5.77%. Berkshire Hathaway, a new entrant in the market, had a profitability index of 14.28% for the first sixth months of 2008. The profitability index measures a company's weighted average premium rate divided by its weighted average capital charge.
But Standard & Poor's warned that the pricing may not hold up in the future.
"Although pricing has been strong, a shrinking municipal market, combined with the possible entry of new competitors, will likely pressure pricing in our view," Standard & Poor's wrote.