WASHINGTON — Democratic and Republican members of the House Financial Services Committee yesterday espoused completely different views about the effect of an amendment added to the credit rating agency bill that focuses on ratings of municipal securities.

As drafted, the Accountability and Transparency in Rating Agency Act, which the committee plans to vote on today, would require nationally recognized credit rating agencies to base ratings of municipal general obligation bonds on the likelihood of repayment. The provision was designed to ensure that municipal bonds are rated more similarly to corporate bonds, which have higher default rates.

Many municipal issuers have complained that their bonds are not rated highly enough because their ratings do not the reflect the small likelihood that their bonds will default. Leading Democrats on the committee, chairman Barney Frank, D-Mass., and capital market panel chairman Paul Kanjorski, D-Pa., have agreed with those issuers and taken up their cause. Hence the provision in the bill.

But yesterday during committee consideration of the bill, Rep. Jeb Hensarling, R-Tex., complained that the legislation would dictate the methodologies the rating agencies must use to rate municipal securities.

“I think [the rating agencies] should be free to use different models and methodology and not have them dictated by Congress,” he said.

Hensarling also warned that with the recession causing state and local revenues to plummet and their budget gaps to widen, “there could be a wave of defaults” in the municipal market.

The Texan offered an amendment that would strike a portion of the bill’s language and direct the Securities and Exchange Commission to conduct a study of, and report to the committee within six months on, “whether there are fundamental differences in the treatment of different classes of bonds by such rating organizatons that cause [them] to suffer from undue discrimination.”

Hensarling clearly believed his amendment would scuttle the bill’s provision requiring muni GOs to be rated only on the basis of repayment.

However, Frank claimed the amendment would not only keep the muni rating restriction intact, but also open it up to all munis, including revenue bonds. As a result, the rating agencies would be forced to rate all muni bonds on the basis of repayment, not just GO bonds. 

Frank and other committee Democrats agreed to the amendment and voted to adopt it.

Hensarling’s staff insist the amendment will let rating agencies rate municipal securities according to various factors, and not just on the basis of repayment. They say it will maintain the status quo.

But the Democrats are certain Hensarling just broadened the restriction to cover all municipal securities.

The language in dispute appears on pages 24 and 25 of the bill.

The Government Finance Officers Association and nine other state and local government organizations sent a letter to Kanjorski yesterday supporting the rating agency bill.

Following the mark-up, Susan Gaffney, director of the group’s federal liaison center, stated that the committee’s actions will allow state and local government bonds be rated more fairly. She applauded the language in the legislation that calls for the ratings criteria to be based on the ability for the issuer to repay the investor, an area where munis surpass their corporate counterparts. Gaffney said she does not think that the Hensarling amendment weakens that provision in the bill.

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