Stop the De-Stimulus

WASHINGTON - Rep. Jim Himes, a freshman Democrat from Connecticut who sits on the House Financial Services Committee, says he knows through first-hand experience why a short-term federal reinsurance program for municipal bonds is "urgently needed."

Himes, who helped draft legislation that would authorize the creation of such a program, said that several municipal issuers in his district and across the country, especially lower rated municipalities and nonprofits, are delaying capital projects because they have been unable to secure credit enhancement on their bonds.

"You've got this de-stimulus out there," Himes said in an interview last week. "Lots of very good credits are not undertaking capital projects that they would love to undertake, at a time when construction costs and commodities are relatively inexpensive, because of this vapor-lock in the market."

Himes, who plans to talk about the bill this morning at the Securities Industry and Financial Markets Association's municipal bond summit in New York City, said the matter hits close to home. Last year, the dearth of stable bond insurers forced Bridgeport Hospital, a 425-bed, acute-care nonprofit located in his district, to defer the issuance of debt to finance capital projects.

The hospital, which does not have an underlying rating, needed credit enhancement for bonds to be issued by Connecticut Health an Educational Facilities Authority in a conduit transaction. But insurance was hard to come by last year and is even scarcer now. There is only one remaining highly rated insurer in the state, Assured Guaranty, which market participants say is selectively underwriting insurance on highly rated credits.

"Hospitals are typically more problematic credits than municipalities and states that have the right to tax," Himes said. "But this legislation would really help them because the cost of getting bond insurance is really prohibitive."

Supporters of the bill, which was formally introduced May 21 by Rep. Emanuel Cleaver, D-Mo., and include Himes and five other cosponsors, believe the proposed five-year, $250 billion program would boost any remaining private insurers that suffered downgrades to their ratings because of their exposure to tainted mortgage-related structured finance products, as well as new entrants into the insurance business. That in turn would make it easier for smaller, lesser known issuers to borrow in the capital markets, they contend.

Jeffrey A. Asher, executive director of CHEFA, noted that if borrowers like Bridgeport Hospital tried to sell bonds on their own without credit enhancement, they would have to obtain a rating and would probably pay at least 8% interest on the bonds. That compares to rates of about 4.5% two years ago when bond insurers like MBIA Insurance Corp. still had triple-A ratings, he said.

"Himes has been incredibly helpful at getting some changes at the federal level to strengthen the municipal bond market," said Asher, who noted that at least two additional hospitals in Himes' district, in Stamford and Norwalk, have also delayed capital projects because they have been unable to find credit enhancement.

In all, four muni-related bills are pending before the House Financial Services Committee, which is expected to mark them up sometime this summer. The other three bills would authorize a short-term liquidity facility for variable rate demand notes, require the registration of financial advisers with the Securities and Exchange Commission, and mandate uniform credit rating agency ratings for municipal and corporate debt.

Himes, 42, came to Congress in January, after defeating former Republican Rep. Christopher Shays in the fall. A graduate of Harvard College and a former Rhodes scholar at Oxford University, Himes spent 12 years working for Goldman, Sachs & Co. before leaving in 2002 for a job with the Enterprise Community Partners, a nonprofit that finances community development and affordable housing.

He said he remains passionate about both affordable housing and "green" building development. Last month, he co-introduced a bill with Rep. Ed Perlmutter, D-Colo., that would provide incentives for green developments by authorizing a Department of Housing and Urban Development guarantee on the incremental costs of "sustainable building elements" on new developments rather than using less-efficient traditional buildings materials.

Turning to the muni legislation, Himes said he understands the apparent reluctance of the Treasury Department to intervene in the municipal market, but noted that the reinsurance program is far different from the other economic recovery programs meant to prop up large financial institutions.

The reinsurance program would likely operate much like the Federal Deposit Insurance Corp., in which the participants pay premiums, he said, adding: "If we do it right, it should be cost-neutral."

Noting that Treasury has been responding almost on an hour-by-hour basis to financial services firms because the last few months have shown they could "simply go under over night," Himes said the "crisis in the muni market is no less severe, but it's in much slower motion."

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