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Geithner Eyes VR Liquidity Backstop

WASHINGTON - Treasury Secretary Tim Geithner yesterday said he is looking at options, including the possibility of a liquidity backstop for variable-rate debt, to "reinforce" some improvement that has occurred in the municipal market.

Speaking to reporters yesterday about the details of Treasury's Public-Private Investment Program, Geithner acknowledged receiving the letter sent Friday by House Financial Services chairman Barney Frank, D-Mass., and 25 other House members requesting a temporary liquidity backstop for variable-rate debt.

"We're taking a careful look at it. A number of members of Congress, governors, elected officials across the country have encouraged us to explore ways to help bring about further improvements in the muni market," he said. "There has been some improvement in the muni market and we are looking at a range of options to see if we can reinforce those improvements, including the specific measures that chairman Frank and others are considering."

The Treasury's new program is designed to promote lending by removing toxic assets from bank balance sheets. The program combines funds from the Troubled Asset Relief Program and the Federal Deposit Insurance Corp. along with private investment.

The combined funds will create a market for "legacy assets" - mortgages issued or securitized before the credit crisis that have become illiquid. The Treasury will contribute $75 billion to $100 billion from TARP, which will generate $500 billion in purchasing power with the potential to expand to $1 trillion as private investors come on board, according to the department.

The aim of the program is to attract private-sector investment while protecting taxpayers, Geithner told reporters.

The Federal Reserve is also analyzing the liquidity backstop idea laid out in Frank's letter, according to a Fed spokesperson.

Fed chairman Ben S. Bernanke has strictly interpreted the Fed's Rule 13-3, which allows the Fed to make loans to individuals and businesses in extreme circumstances, but not to governments. As a result, municipal issuers have been excluded from most of the Fed's liquidity programs.

The calls for liquidity help came as the variable-rate market froze late last year, but improved somewhat in February. From the beginning of November through January, the par amount of variable-rate debt issuance fell 83% to $1.1 billion from $6.5 billion, according to Thomson Reuters. But from January to February, the issuance more than doubled to $3 billion. However, issuance was still down 16.5% from a year ago.

Meanwhile, shares of MBIA Inc. and Ambac Financial Group Inc. rose yesterday amid speculation that the companies might participate in the Treasury program. Ambac shares rose 34.3% to 94 cents and MBIA shares rose 21.7% to $5.05.

But it is unclear whether the bond insurers would participate as asset buyers, sellers, or both. In its release yesterday, the Treasury said that insurance companies are "particularly encouraged" to participate in the plan as buyers along with individual investors, pension plans, and other long-term investors.

However, spokespersons for Ambac and MBIA said they might like to participate as asset sellers. They said their companies are studying the plan and that it is "premature" to assume they will be able to participate as asset sellers.

The companies, which insure asset-backed securities held by other investors, are unsure if they will have to continue to pay insurance on assets that are bought or supported with government funds.

"Will we be paying the government? That doesn't make sense," said Vandana Sharma, a spokeswoman for Ambac.

She said Ambac might consider selling illiquid assets the company holds in its investment portfolio - a small portion of assets compared with the $430 billion it insures. If Ambac can get a price that makes financial sense, then the company would consider selling assets in the Treasury program, she said.

MBIA also is interested in the expanded Term Asset-Back Securities Loan Facility program announced last week by the Fed and Treasury, said Kevin Brown, a spokesman for the company. TALF provides Fed loans to program participants that are collateralized with investment-grade, asset-backed securities.

Treasury officials were not available for clarification on bond insurers' potential participation as sellers in the program.

Lawmakers such as Frank have grown increasingly vocal about the plight of municipal issuers.

Also on Friday, Sen. Jeanne Shaheen, D-N.H., sent a letter to Geithner urging Treasury to purchase tax-exempt housing bonds either directly or through the government-sponsored entities Fannie Mae and Freddie Mac, to enable housing finance agencies "to provide affordable mortgages and to reinvigorate the housing market."

The Obama administration has been receptive to the liquidity backstop idea, said Scott DeFife, managing director of government affairs with the Securities Industry and Financial Markets Association.

"We've met and talked with [Congress] members about the problems in the muni market," DeFife said. SIFMA is "very supportive" of the Frank letter, he said, adding that "it's largely consistent with what we've been asking for" from Treasury and the Fed.

But House Republicans expressed skepticism about the plan, saying it will not encourage private investment or protect taxpayers.

"In its current form, Secretary Geithner's plan is a shell game that hides the true cost of the program from the taxpayers that will be asked to pay for it," said House Republican Whip Eric Cantor, Va.

Lynne Funk contributed to this story.

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