WASHINGTON - A federal insurance regulator that would oversee bond insurers but not displace existing state regulators may be a good idea, panelists and lawmakers said at a House panel hearing on bond insurers yesterday.
Addressing the House Financial Service's subcommittee on capital markets for nearly two hours, New York Gov. Eliot Spitzer said that establishing a federal regulator is a "notion" that Congress should seriously consider.
"There might not be any harm that would result from having a more structured, organized, national regulator for the insurance sector," he said. "But I do not want it to be a regulator that would totally supplant the role of the states."
Spitzer's comments came after several lawmakers, including the panel's chairman, Rep. Paul Kanjorski, D-Pa., said they were mulling the idea of a new federal regulator. Rep. Ed Royce, R-Calif., also a member of the panel, said it is "regrettable" that no such federal entity exists, and that the ongoing bond insurance crisis will be repeated until Congress creates one.
"The lack of a world-class regulator that is able to effectively comment on the broader insurance industry as it relates to the national economy and capital markets around the world is going to continue to hamper that industry and our economy until Congress acts," Royce said.
Yesterday's hearing marked one of the few occasions in recent memory that a congressional panel has addressed an issue of central concern to the municipal securities market: how market participants can act to resuscitate or structure the failing bond insurers, which have been plagued by downgrades and massive mark-to-market losses because of their exposure to the subprime mortgage crisis.
But if the hearing signalled that the market is a step closer to seeing a fundamental restructuring of insurers, it remained unclear how that would come about.
Panelists referenced several options, including two failed efforts by consortiums of banks to bail out insurers.
Another option considered by Spitzer and New York insurance superintendent Eric Dinallo would involve peeling away the unblemished municipal credits from the portfolios of the insurers, which have been tainted by collateralized debt obligations and other fixed-income products with questionable credit quality.
If such an idea became a reality, bond insurers would be split into two businesses, Dinallo said.
"One would have the municipal bond policies and any other healthy parts of the business," he said in the prepared remarks. "The other would have the structured finance and problem parts of the business."
His comments follow a closely-watched offer by Warren Buffett to reinsure $800 billion in municipal bonds now insured by Ambac Assurance Corp., MBIA Insurance Corp., and Financial Guaranty Insurance Co, through his Berkshire Hathaway Assurance Corp.
While market participants have said that Buffett's idea would not help the insurers themselves under the current market conditions, it could help stabilize municipal securities market.
"It's consistent with the overall discussion of the fundamental restructuring of the bond insurance and how it works," Matt Fabian, managing director at Municipal Market Advisors, said in an interview with The Bond Buyer. "The stuff Buffett is talking about could only happen if there is a fundamental change in how bond insurance operates."
Spitzer said that changes are immediately needed, noting among other problems the widespread failures of auction-rate securities. He hoped that a deal could be reached to restructure the largest bond insurers within the next week.
"It's time for deals to get done," he told the committee.
Lawmakers stressed that there are some steps Congress could take to increase municipalities access to credit enhancement. Kanjorski repeatedly pushed the idea of legislation pending in both the House and the Senate that would allow the Federal Home Loan Banks to provide letters of credit for small, tax-exempt bond deals sold by states and localities or small nonprofit health care facilities, colleges, or universities.
The legislation would put the FHLB system on the same level as Fannie Mae and Freddie Mac, two other government-sponsored enterprises that are permitted to issue LOCs in support of tax-exempt bonds. Currently only housing bonds can be backed by a federal guarantee and still retain their tax-exempt status.
In his opening statement, Kanjorski urged Congress to pass the FHLB legislation, and his comments were echoed by market participants who were scheduled to address his panel as The Bond Buyer went to press.
"This would create a new source of credit enhancement for states and localities suffering as a result of the bond insurers' troubles," said Richard Larkin, a senior vice president at Herbet J. Sims & Co., in prepared testimony.
Both Kanjorski and the Rep. Spencer Bachus, R-Ala., the ranking Republican on the House Financial Services Committee, said repeatedly that they want Congress to boost the transparency of the municipal securities market.
Specifically, Bachus said he would like Congress to adopt the municipal initiatives unveiled last summer by Securities and Exchange Commission chairman Christopher Cox to boost muni disclosure and accounting standards.
The initiatives, which among other things would make muni disclosure more like corporate disclosure in terms of timing and quality, are controversial among issuers who are opposed to additional federal regulations over the market. No lawmaker has introduced legislation that would incorporate them, and Rep. Barney Frank, D-Mass., the chairman of the House Financial Services committee, has indicated he does not support them.
But Bachus suggested yesterday that there could be a way for Congress to approve the initiatives in a manner that improves muni market transparency while respecting the sovereignty of states and local governments.
"Chairman Cox's initiatives would require meaningful public disclosure that is current and understandable, with full accounting of all material information at the time of a new municipal bond issuance," Bachus said. "This committee should closely consider Chairman Cox's proposals, keeping in mind that any federal reforms of the municipal securities market must take into account the legitimate interest of the states and municipalities."
As The Bond Buyer went to press, the committee had yet to hear from several scheduled panelists, including officials from MBIA and Ambac, as well as William Ackman, an outspoken critic of the bond insurers and a managing member of Pershing Square Capital Management LP.
In prepared testimony, MBIA chief financial officer Charles Chaplin and Ambac chairman Michael Callen both planned to argue that neither a bailout nor additional federal regulation is needed.
"The notion of a 'bailout' of highly creditworthy companies who, at most, are at risk of losing the very highest ratings available is misplaced," Chaplin said in prepared remarks.
Callen was expected to argue that "stable and predictable" credit ratings by the ratings agencies are needed to restore confidence in the insurance industry, according to the Associated Press.
Ackman was expected to emphasize earlier public comments that Buffett's offer to reinsure munis is good for the market because it would allow the insurers to free up capital to handle losses on the insurers' structured finance products that they have also insured. But muni market participants have been dubious of that claim, however, because they said the insurers would have to pay Buffett too much to reinsure their munis. q