WASHINGTON--A congressman who has scheduled a hearing on thechallenges faced by bond insurers said their current difficultiespoint to a "real need" for stronger oversight of the industry.

The comment by Rep. Paul Kanjorski, D-Pa., chairman of theCapital Markets Subcommittee of the House Financial ServicesCommittee, came as he released letters he sought from regulatorsasking how the industry is regulated and what are its problems.

He announced that a hearing on bond insurers' issues would beheld Feb. 14.

"Because the problems created by unrest in the bond insurancemarkets go to the heart of our economy and the very vitality ofmunicipal finance, we must examine these matters as soon aspossible in a hearing before the Capital Markets Subcommittee,"Rep. Kanjorski said.

The primary concern of the House Financial Services Committee isthat the difficulties of the credit insurance industry will impactthe sale of municipal bonds used to raise funds for state and localcapital development projects, further slowing the economy.

Rating firms have threatened to revoke the "triple-A" ratings ofbond insurers, and without a sound underwriter behind municipalissues, they become less attractive to buyers and unacceptable torisk-averse pension and investment funds.

On Tuesday Sandler O'Neill, which analyzes bank stocks, said ina note to investors that a "handful" of U.S. tax-exempt bondauctions over the past several weeks have failed because of thedifficulty in getting credit insurance.

In its note, Sandler O'Neill analysts said Piper Jaffray actedas dealer in four failed auctions last week. "We believe this ismeaningful because it is really the first time tax-exempt bondauctions have failed since 1991 and also highlights a potentialspillover impact of capital adequacy concerns in the monoline bondindustry," the analysts said.

Rep. Kanjorski, in advance of his hearing, sought input fromfederal and state financial regulators. Among the letters inresponse was one from Wisconsin Insurance Commissioner Sean Dilweg,who said the problem bond insurers are having is not one ofsolvency but of credibility in the marketplace created by theirdecision to stray from their core business of insuring municipalbonds into more exotic lines of products.

Mr. Dilweg's state is the domicile for Ambac Assurance, which onJan. 18 saw Fitch Ratings drop its financial strength rating to"double-A" from "triple-A."

Ambac is currently negotiating with various banks for a cashinfusion in the wake of a huge plunge in its stock price followingthe Fitch action and other rating firms placing it on watch.

Ambac's problems stem from concerns it may not have theresources to pony up cash to pay for financial guaranties itprovided to structured investment vehicles backed by subprimemortgages on which borrowers are defaulting.

"I currently view the situation with Ambac as a franchise valueissue rather than a solvency issue," Commissioner Dilweg said inresponding to Rep. Kanjorski.

"The most recent statutory financial statements of Ambac and allthe information we have from the company show a financially strongcompany that has sufficient ability to meet its obligations to itspolicyholders, on both an incurred and cash-flow basis," he said.He said Ambac "meets or exceeds all of the financial solvencyrequirements" established by the state.

Commissioner Dilweg said the municipal bond guaranty business ofAmbac "currently is, and all signs point to a continued stable,profitable line of business."

The problems, he said, stems from the securitized investmentbusiness guaranty business that Ambac and most other bond insurersbegan writing in the 1990s, and "which has more volatility."

"I think the combination of the uncertainty in the financialguaranty and credit markets with the increased potential claims onsome of these securitized investments has resulted in the ratingagency's actions," Commissioner Dilweg said.

"They are calling into question not so much the solvency ofthese companies but rather the ongoing franchise value of theseinsurers," he explained.

Besides Commissioner Dilweg, others who responded to Rep.Kanjorski's request for information about the plight of bondinsurers, how the industry is regulated and the potential impact onthe financial markets included the Federal Reserve Board, theSecurities and Exchange Commission, the Office of the Comptrollerof the Currency, and state regulators from Maryland and NewYork.

Ralph Tyler, Maryland insurance commissioner, is the regulatorof ACA, a credit insurer whose downgrade to "triple-C" has resultedin its being unable to write new business.

Commissioner Tyler said ACA's current problems stemmed from thedecision of it and other financial guaranty insurers in the early2000s to expand their products to include guarantees on structuredcredit insurance products, for example, through insured creditdefault swaps.

"The financial assets underlying the insured credit defaultswaps principally include corporate credits, asset-backedsecurities and mortgage-backed securities," Commissioner Tylersaid.

"This business, particularly that portion of which theunderlying assets consist of subprime mortgage-backed securities,is the source of the current issues faced by certain financialguaranty insurers," he said.

"The uncertainty concerning the ultimate performance of subprimemortgage-backed securities, and the resultant potential for futurelosses, is central to recent rating agency actions," CommissionerTyler said.