WASHINGTON–Concerned that bond insurers' weakness will raise borrowing costs for state and local government, members of a House committee said today they will hold a hearing next month to examine whether stronger regulation for the sector is needed.

At a briefing for reporters today on the House Financial Services Committee agenda for this year, panel Chairman Rep. Barney Frank, D-Mass., said a hearing will be held by the Capital Markets Subcommittee Feb. 14.

Rep. Frank Kanjorski, D-Pa., the subcommittee's chairman, disclosed later that he had written letters to federal and state regulators seeking more information and is demanding a reply by Feb. 1.

His examination of the insurance industry will focus “on its strength, the resulting implications for the financial marketplace and municipalities of ratings downgrades, and the potential need for regulatory reforms,” Rep. Kanjorski said.

Meanwhile, in New York, Insurance Commissioner Eric Dinallo has been holding meetings with banks, regulators and other stakeholders in the bond insurance crisis to try and craft a financial plan that would prop up bond insurers against falling financial strength ratings.

In his comments, Rep. Frank sought to restore confidence in the high end of the bond insurance market by saying there is no reason general obligation bonds issued by state and local governments should be buffeted by a turbulent credit market.

The fate of “more exotic” issuances by state and local governments is another story, he said.

Mr. Frank's comments were based on the fact the insurers' problems are making it harder for cities, counties and states to raise money for projects, exacerbating the present economic downturn.

The troubled insurers include Ambac, which is domiciled in Wisconsin; MBIA, which is based in New York; and ACA Capital, which is domiciled in Maryland. Banks have agreed to give ACA, which was downgraded to “triple-C” from “A,” more time to come up with an acceptable plan.

Ambac was downgraded last week one notch to “double-A,” and MBIA has been placed on credit watch facing loss of its coveted “triple-A” rating. The concern focuses on the fact they are much larger factors in the bond-insurance marketplace.

Rep. Kanjorski said his inquiry had begun by sending letters to the Federal Reserve; the Federal Reserve Bank of New York; the Office of the Comptroller of the Currency; the Securities and Exchange Commission; the National Association of Insurance Commissioners; and insurance regulators in Maryland, New York and Wisconsin, which have initial oversight over the three most exposed bond insurers.

In his letter to the regulators, Rep. Kanjorski said that in recent years, many bond insurers moved from their core business of assuring municipal debt and began guaranteeing risky, complex structured finance products backed by subprime mortgages.

“The current problems in the subprime mortgage market have resulted in downgrades and losses for several bond insurers and have the potential to spread to other areas of our financial markets,” he said.

Downgrades could force a sell-off of pension fund assets and could also result in higher borrowing costs for municipal construction and financing efforts,” Rep. Kanjorski said. “We need to act promptly to understand these developments.”

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House To Hold Hearing On Bond Insurance

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