WASHINGTON - House Financial Services Committee chairman Barney Frank is "reassessing" and may drop the inclusion of federal guarantees for general obligation debt that he originally planned to include in an omnibus municipal securities bill his staff is drafting, congressional sources familiar with the matter said.

The Massachusetts Democrat, who plans to hold a hearing on the bill on May 5, now intends to include four provisions in the legislation, which could be introduced before the hearing.

They will likely include: a temporary federal liquidity facility for variable-rate demand obligations and a temporary reinsurance program for revenue bonds; a requirement that municipal and corporate debt be rated on a "global" scale based on the likelihood of timely repayment to the creditor; and requirements that currently unregulated muni financial advisers be subject to some kind of federal regulation and professional standards.

"There are complications of doing direct guarantees [of GOs], which we recognize," said one of the sources. "But the liquidity facility and reinsurance may do the job ... of bolstering the municipal market."

The source added that the provisions could be introduced as one bill or in as many as three separate bills.

Congressional sources declined to say precisely why the federal guarantees are likely to be dropped from the bill, though the idea did receive stiff resistance from several market participants and was subject to a blistering Wall Street Journal editorial last week.

One of the congressional sources also noted that Frank may have faced obstacles from the House Ways and Means committee, which has jurisdiction over tax matters. Currently, the Internal Revenue Code prohibits federal guarantees on tax-exempt bonds.

In an outlook report two weeks ago, Municipal Market Advisers opposed the GO guarantees, arguing that issuers would steer "substantially more projects into wrapped GO offerings and away from alternatives" like water or sewer revenue bonds or debt backed by sales taxes.

"Purely revenue bond issuers may see their capital costs rise," MMA said, adding, among other things, that Frank has compared the GO guarantee proposal to the Federal Deposit Insurance Corp.'s guarantee of bank deposits, which entails extensive regulation of domestic banks.

"We feel that systematic federal guarantees of muni bonds would accordingly threaten the Tower Amendment's limits on federal regulation of muni issuers and muni bonds," MMA said.

The Tower Amendment was added in 1975 to the Securities Exchange Act of 1934 and bars the SEC and Municipal Securities Rulemaking Board from requiring municipal issuers to directly or indirectly file documents with them before issuing municipal securities.

The specifics of the bill are still being hammered out. For instance, it is not clear if the Federal Reserve or the Treasury Department - or both - would operate the VRDO liquidity facility.

In a letter to lawmakers last month, Fed chairman Ben Bernanke warned that VRDOs may not be a viable financing mechanism for states and localities going forward.

"The current financial crisis has exposed the vulnerabilities of the [variable-rate demand note] market, raising questions about the desirability of its continuation as a significant vehicle for municipal finance," he wrote in a March 31 letter that noted many lower-rated issuers are no longer able to access the short-term market.

But he said that if Congress wishes to provide temporary support for VRDNs, "perhaps during a transition period," it should consider legislation to authorize a government agency to create a liquidity facility that would provide a backstop to commercial banks' letters of credit or standby purchase agreements.

Though several market participants have asked for a federal liquidity facility, the actual size of the VRDO market it would serve is unknown. The MSRB estimated at the end of last year that there was about $400 billion of outstanding VRDOs, while MMA has estimated the figure closer to $500 billion. The board began requiring dealers to submit basic VRDO remarketing information April 1, and it may take until next month for the board to establish a more definitive figure.

Some market participants have noted that the bill would not address the significant pricing disparities between the corporate and municipal investment-grade markets, in which even strong municipal credits are not getting similar pricing for liquidity as lower-rated corporate borrowers.

Joseph Fichera, senior managing director and chief executive officer of Saber Partners, noted this discrepancy existed despite commercial banks' risk capital reserve requirements that are far lower for loans or credit facilities to public-sector entities than to corporations.

Meanwhile, spokesmen at the three major credit rating were not immediately available or declined to comment on the global ratings proposal.

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