N.Y.'s Spitzer to Warn of Possible 'Financial Tsunami'

WASHINGTON — The ongoing turmoil in the capital markets could spiral out of control and lead to a “financial tsunami that causes substantial damage throughout our economy,” New York Gov. Eliot Spitzer is expected to say at a House panel hearing on bond insurers tomorrow. Click here to see Spitzer's Testimony.But rather than blame specific market participants for the credit crunch, Spitzer plans to urge state regulators, banks, and rating agencies to work together to strengthen the bond insurers. He said a new federal regulator for insurers is not necessary.

“As the primary regulator, the New York Insurance Department has the powers and ability to deal with the issue,” Spitzer is expected to say, according to a copy of his testimony. The department “responds to more than 60,000 consumer complaints a year. I’m sure most other state insurance departments are just as active. I don’t know of any federal regulator that is that responsive to consumers.”

Spitzer also plans to warn that small towns and rural communities may have trouble accessing the capital markets or may have to pay a higher price for such access if they cannot obtain bond insurance. Many small issuers need insurance to “put their bonds on an equal footing with large state authorities and big cities,” he plans to say.

“If they cannot obtain bond insurance or have to pay a higher price for it, it will likely cost them more to borrow the funds they need for important capital projects. Again, that will mean delay or cancellation of important capital construction, or increases in taxes or fees that pay for these bonds, or less money for vital services,” his testimony will state.

Tomorrow’s hearing before the House Financial Services subcommittee on capital markets comes about three weeks after the panel’s chairman, Rep. Paul Kanjorski, D-Pa., announced he had launched an inquiry into the bond insurance industry and asked federal and state regulators for information, including whether statutory or regulatory reforms are needed. A week ago, his staff released responses from federal and state regulators, some of whom will speak tomorrow, including New York State Insurance Superintendent Eric Dinallo.

In an interview with The Bond Buyer last month, Kanjorski said his staff is exploring creating a federal regulator or modifying a multi-state compact to increase oversight and provide more uniform standards for insurers of municipal bonds and other financial products.

Other panelists plan to propose immediate solutions to alleviate the consequences of rating downgrades on bond insurers that don’t involve the creation of a federal regulator.

Richard Larkin, a senior vice president at Herbert J. Sims & Co., formerly of J.B. Hanauer & Co., plans to say that bond rating agencies should map municipal transactions to their global ratings scales, and include the global rating equivalent of a bond with its municipal rating. Click here to see Richard Larkin's statements.Only Moody’s Investors Service has mapped muni ratings to its global scale, but Larkin plans to say that the other two major ratings agencies, Standards & Poor’s and Fitch Ratings, should follow suit.

“If this system were in place, there would be a large increase in double-A and triple-A rated securities that would be eligible for money market fund investment,” Larkin plans to say. “This kind of action, however, assumes that the raters were willing or able to increase the number of underlying ratings where they currently do not exist.”

Congress also could help create additional sources of credit enhancement by passing legislation pending in both the House and the Senate that would allow the Federal Home Loan Banks to provide letters of credit for small, tax-exempt bond deals sold by states and localities or small nonprofit health care facilities, colleges, or universities, Larkin will say.

The legislation would put the FHLB system on the same level as Fannie Mae and Freddie Mac, two other government-sponsored enterprises that are permitted to issue LOCs in support of tax-exempt bonds. Currently only housing bonds can be backed by a federal guarantee and still retain their tax-exempt status.

“This would create a new source of credit enhancement for states and localities suffering as a result of the bond insurers’ troubles,” Larkin plans to say. Click here to see MBIA's Testimony.

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