WASHINGTON - House Financial Services Committee chairman Barney Frank plans to push for the establishment of a federal insurance program that would back municipal debt sold by state and local issuers.
Though details of the program have yet to be worked out, the Massachusetts Democrat said yesterday that a federal insurance entity is needed now that the ratings of most monoline bond insurers have deteriorated because of their exposure to mortgage-related structured products.
"If you were to insure bonds issued by these municipalities, with some limitations, and you had the federal government be paid by their insurance premiums ... it would cost the federal government zero ... and it would substantially reduce the interest payments" that municipalities are paying now, Frank said at a press conference in which he outlined his committee's agenda for the year.
Frank's comments come after he said last month that municipalities are among the most sympathetic victims of the financial crisis because their capacity to finance services has been impaired "by factors well beyond their control." He promised to "try to come to their aid."
But it is not clear what model Frank would follow to legislatively establish such an insurance program.
Last week, Rep. Gerald Connolly, a freshman Democrat from Fairfax County, Va., who is close to Frank, said he likes the idea of a federal insurer-of-last-resort for the muni market, but is open to other suggestions.
Another idea floated by the National League of Cities late last year calls for the establishment of a mutual bond insurance company that would be capitalized initially by the federal government but owned and operated by governmental issuers.
Congressional sources said that no decision has yet been made on what model to pursue.
Meanwhile, in his remarks yesterday, Frank took aim at the rating agencies for continuing to rate municipal bonds on a separate scale than the one used for corporate debt.
Citing testimony before his committee last year from Ajit Jain of Berkshire Hathaway Assurance Corp., Frank said: "If rating agencies rated municipal bonds by the same standards that they rate corporate bonds, i.e. the likelihood of default, there would be no municipal bond insurance because it would be clear that none was necessary."
Frank also acknowledged that he has invested heavily in municipal securities. Congressional disclosure filings show that in 2007 he held between $624,000 and $2.68 million of municipal debt issued by his home state of Massachusetts or on behalf of school districts there .
Market participants had mixed reactions to the idea of establishing a federal government muni bond insurer, though. Two market participants who asked not to be identified noted that there are some private-sector groups trying to establish insurers, pointing to the Municipal and Infrastructure Assurance Corp., which is co-sponsored by Macquarie Group and Citadel Investment Group, and is working with rating agencies and regulators to get ratings and approval to write new business.
Other new entrants include Berkshire, which is insuring the bulk of the debt it backs in the secondary market.
Congress "ought to be doing what they can to find private solutions," said one of the sources, who noted that the new private-sector entrants would not repeat the mistakes of the monolines by exposing themselves to risky structure products. "There are lots of people who are trying to get into the municipal space."
But Michael Decker, co-chief executive officer of the Regional Bond Dealers Association, said yesterday that some form of federal insurance for the muni market is "a great idea" and "would really address a big whole in the market with the loss of capacity among the monoline bond insurers."
Asked if there are legitimate concerns about the federal government crowding out any remaining or new private-sector bond insurers, Decker said the government would have to take that into consideration. But, he said, federal involvement may be warranted in the current market, where there is arguably a market failure.
"If we remain in an environment where bond insurance counts for a small portion of the market, it's going to take the market quite a while to get used to that environment ... where there's much less commoditization," he said.
