Bond Insurance For Cities, States Takes Heat In House
Chairman Frank explored whether the federal government could serve as a reinsurance backstop to lower costs for cities and states.
House members today questioned the need for cities and states to obtain bond insurance against a risk of default as the $2.6 trillion market for such coverage has skyrocketed following the collapse of the subprime lending market. House Financial Services Committee members in varying degrees showed their concern during a hearing sparked by billions of dollars in increased costs for cities and states because of the downgrading of bond insurers who backed risky investment strategies, a problem compounded by a credit crunch.
For example, Financial Services ranking member, Congressman Spencer Bachus, R-Alabama, noted that his home of Jefferson County has been forced to increase payments on local sewer bonds from 3 percent to 10 percent.
"These higher costs will come out of the pockets of local taxpayers in my district in the form of reduced services or higher fees and taxes. We need to act swiftly and responsibly to ensure that our markets get back on track before too much more damage is done," Bachus said.
Financial Services Chairman Barney Frank (D-Massachusetts) noted there has been more
than 14,000 issuances of general-obligation bonds by local governments since 1970 and no defaults.
"Requiring general-obligation issuers of full faith-and-credit bonds where the taxing power of the entity stands behind them ... is like asking a vampire to buy life insurance because nobody will ever have to pay off," Frank said.
"This has got to be fixed.
We cannot tolerate a situation where elected officials trying to build schools and comply with mandates from the federal government to improve the treatment of sewage and build highways .. are charged much more than they should be charged."
Much of the ire was focused on credit-rating agencies and bond insurers. "This is nothing more than legalized extortion," said Congressman Michael Capuano, D-Massachusetts.
"The ratings agencies, the bond insurers, those compliant regulators effectively in my opinion stole millions, if not trillions of taxpayers' dollars to put in their pocket."
Chairman Frank explored whether the federal government could serve as a reinsurance backstop to lower costs for cities and states.
New York Insurance Superintendent Eric Dinallo said a federal government guarantee would be more highly rated than current standards and would allow more capital flow through the marketplace during a liquidity crisis. "I support it strongly ... to free the towns and cities of a tax, a secret tax that is imposed by Wall Street," said Connecticut Attorney General Richard Blumenthal.
Chairman Frank said he would only want to provide the option for general-obligation bonds backed by taxpayers, and not for risky strategies such as those that landed Orange County, California, into bankruptcy in 1994 because it leveraged its investments into derivatives that plummeted. "Plain vanilla. If you start getting fancy, then you are out of our loop. I think that might save a lot of grief as well," Frank said. Blumenthal called on Congress to pass legislation that would prohibit credit-rating agencies from assigning different ratings to bonds with similar rates of default and risk.
Critics charge that rating-agencies engage in dual ratings system where municipal bonds often receive lower ratings than corporate bonds with the same or higher risk of default. Bachus said he agreed there "has been a double standard" against municipal bond ratings. "I've not understood that," he said.
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