Support is growing, at least in the House of Representatives, for parallel federal regulation of bond insurers because of the upheaval in the municipal bond market caused in part by carriers expanding into far riskier subprime mortgage securities.

New York Insurance Superintendent Eric Dinallo defended the actions of state regulators in testimony last week before the House Financial Services Committee. He laid out what regulators are doing to deal with the crisis and his department's plans to impose new rules mandating greater transparency into risks insurers guarantee.

For example, Mr. Dinallo said state regulators are considering whether bond insurers should be prohibited from guaranteeing instruments called collateralized debt obligation "squareds," which are the midlevel CDO tranches.

While defending continued state regulation, Mr. Dinallo warned that "it is important to understand that even restoring some confidence in the bond insurers' credit ratings is not likely to resolve all the current problems."

The committee's emerging position was voiced most effectively by Rep. Spencer Bachus, R-Ala. The ranking minority member said bipartisan support is growing in the committee for a proposal outlined last year by Securities and Exchange Commission Chairman Chris Cox requiring meaningful public disclosures "that are current and understandable, with a full accounting of all material information at the time of a new municipal bond issuance."

Rep. Bachus said Committee Chair Barney Frank, D-Mass., "has agreed to invite Chairman Cox to appear before the committee later this year to formally consider his proposal."

His comment added substance to Rep. Frank's opening statement, in which he said municipalities are having to pay extremely high prices to float tax-exempt debt--a problem, he said, caused by "grievous misjudgments by the private sector" in securitizing risky debt, much of it backed by subprime loans that are defaulting.

"I am going to say to the rating agencies and to the insurers that they have about a month to fix this," Rep. Frank said in comments before the meeting.

He also said that because of the low default rate on municipal securities compared with private-sector debt, it may be unnecessary for municipal issuers to get bond insurance on their debt.

However, while criticizing rating agencies for the way they deal with municipal debt, California Treasurer Bill Lockyer responded to Rep. Frank by cautioning that insurance might still be necessary because municipalities, in offering documents for debt, many times understate their financial condition and their obligations--for example, pension liabilities.

He also cited Orange County, which became insolvent in 1994 while seeking to keep taxes low and services high by purchasing risky derivatives. When the derivatives turned sour, the county found itself facing huge obligations, he recalled.

Rep. Frank later clarified his remarks, saying he would only want to provide the option for general-obligation bonds backed by taxpayers, and not for riskystrategies such as those used by Orange County. These same problems are now affecting the county that includes Birmingham, home district of Rep. Bachus.

Rep. Frank also urged sticking with "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."

Effectively, in his comments Mr. Lockyer supported Mr. Dinallo, saying the answer to the crisis is greater transparency in offering statements for municipal debt.

Mr. Lockyer also called the bond rating system for municipal securities "fundamentally flawed," because they hold municipal issuers to a higher standard than corporate issuers.

Further describing the rules the department is drafting, Mr. Dinallo said "there is nothing inherently wrong with securitization. Properly used, it can be a valuable tool for raising capital and spreading and therefore reducing risk."

However, he added, "we must understand the risk of moral hazard and other agency problems when there are large-scale transfers of risk."

Clearly, he said, "there must be a way to ensure the risks that are securitized are accurately reported through each stage of the process so that underwriters, credit rating agencies, bond insurers and investors all understand the actual risk and make decisions on that basis."