A Denver-based consulting firm is floating a plan to create a mutual bond insurance company, a modified version of a plan created by the National League of Cities that would be in lieu of the federal reinsurance program proposed by House Financial Services Committee members.
Under the plan, HRF Associates LLC would either create a new company or more likely team up with an existing "shell" insurance company, and request $25 billion of interest-free federal seed money from the Troubled Asset Relief Program. The TARP money would be used to finance the purchase of Treasury securities that in turn would serve as the proposed mutual insurers' initial capital cushion.
The new mutual insurance company could begin underwriting insurance for state and local general obligation and essential revenue debt within three months, would have the capacity to provide insurance for up to $2.5 trillion of muni government financings, and would result in essentially "zero cost" to the federal government, according to HRF officials, who estimate they could repay at least a quarter of the federal seed capital in the first five years.
"Our plan clearly attends to the current and long-term needs of Main Street, achieves all of the stated goals proposed in Congress, and more, without placing an enormous financial burden on the federal government," said Thomas Hoens, executive vice president at HRF. "The bottom line is, our plan does 10 times more than what is being proposed in Congress at one-tenth the cost."
The plan comes after the staff of House Financial Services Committee chairman Barney Frank, D-Mass., has drafted legislation that would, among other things, authorize the Treasury Department to provide $250 billion in reinsurance for new credit enhanced muni bonds over five years.
HRF officials said if Frank's bill merely provides reinsurance without a cut-through provision, it will not result in issuers getting any higher ratings than they would obtain with an insurer. A cut-through provision, however, would essentially permit the federal government to guarantee the debt.
HRF is headed by H. Russell Fraser, who along with Hoens and Robert Smith, the firm's executive director, have been developing the plan over the last year. Fraser is a former chief executive officer and president of Ambac and former chairman and CEO of Fitch Investors Service, now Fitch Ratings. The three were founders of ACA Financial Guaranty Corp., which is in receivership and is either settling or letting its existing policies expire.
It appears that the HRF mutual insurance company would be a bigger version of a program proposed by the National League of Cities without the imprimatur of the NLC, which is seeking $3 billion to $5 billion in interest-free TARP loans.