New York Lieut. Gov. Richard Ravitch spoke to state Comptroller Thomas DiNapoli last week about the possibility of using pension funds to create a new bond insurer, Ravitch said in an interview with The Bond Buyer. There is no concrete proposal on the table, however.

"It's on my list of things to delve into now that I may have some responsibility," Ravitch said.

Gov. David Paterson appointed him to serve as his lieutenant governor last month, but Senate Republicans have challenged the constitutionality of the appointment in court.

Ravitch said he first started speaking to people about the possibility last year after seeing the downgrades of Ambac Assurance Co. and MBIA Insurance Co.

"They weren't downgraded because of any default on a municipal bond, they were downgraded because they got involved with insuring some of these more fanciful credit instruments that have sunk our economy," he said. "I saw a cost impact on state and local governments."

Ravitch said using pension funds to invest in bond insurance would "probably" mean creating a new company but that he hadn't worked out the details yet.

"Though you'd have to set up reserves to be in this business you nonetheless could invest those reserves and get a cash on cash return at the same time you were generating fees for becoming an insurer," Ravitch said. "Consequently you'd up the return on the pension fund assets significantly."It's not clear how the different models being talked about for investing in bond insurance would fit into the pension fund's guidelines, said Robert Whalen, spokesman for DiNapoli.

"It is something that we're looking at," Whalen said. "The main driver in this is it has to fit into our pension fund - it's got to be a good fit."

DiNapoli is the sole trustee of the state's pension fund which holds assets valued at $116.5 billion.

Hampton Finer, deputy superintendent and chief economist at the New York State Insurance Department, said that there are a number of ways pension funds can invest in bond insurance. One possibility is to invest in existing insurers, another is to invest in a mutual insurance company.

Under a mutual insurance model, the policy holders own the company after repaying investors, such as a pension funds.

"Mutuals have a difficult time raising capital from the capital markets," Finer said. "But if you sort of restrict your capital needs to these public entities, that's a way around that."

Forming a monoline insurer requires $65 million and a business plan, according to Finer.

"If there are one or two pension funds that are interested in making very large investments, that could be just fine," he said. "There needs to be a significant amount of diversity in the kind credits they underwrite - that's sort of built into the regulation and the economics of the business. I don't know the capital has to come from every pension fund in the country.

"The biggest hurdle would be rating agencies and obviously ratings agencies would be concerned that a mutual would have lax underwriting standards because of political pressures," he said.

Finer said that he did not think that the pension fund could directly enhance credits.

"They would have to invest in a licensed insurer," he said.

Since the meltdown in the bond insurance industry that began in 2007, the department has licensed two muni-only bond insurers: Municipal and Infrastructure Assurance Corp. and Berkshire Hathaway Assurance Corp.

"We're open to licensing others as long as they have a good business plan and access to capital," Finer said. "So far I don't think anybody is at that stage."

In May, the National League of Cities proposed creating a mutual bond insurer based on a model that would use a $5 billion equity investment from the U.S. Treasury. Cathy Spain, director of the center for enterprise programs for the organization said they had had talks with retirement systems but that their model wouldn't provide the kinds of returns that pensions were looking for.

New York City Comptroller William Thompson Jr., who oversees city pension funds, has been approached recently by private companies about investing pension funds into bond insurance.

"We have listened to some pitches regarding the issue and have discussed it internally but the pension boards have not discussed it," Thompson spokeswoman Laura Rivera said in an e-mail. "We still need to look at it more deeply and do some more due diligence before we make a decision."

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