Rep. Frank Would Have U.S. Insure Municipal Bonds

WASHINGTON--Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said today that he will work with another House committee chairman to draft legislation that would create a federal agency that would guarantee municipal bonds.

In comments after a wide-ranging news conference, Rep. Frank seemed to acknowledge that such an agency could take away one of the most profitable revenue streams from state-regulated monoline bond insurers.

Impacted by losses related to subprime mortgages, many bond insurers have struggled to maintain the financial strength rating necessary to back municipal bonds.

Rep. Frank also said that omnibus budget legislation to be introduced next week will include a provision extending the authorization of the current National Flood Insurance Program until September.

He said one of the panel's first priorities this year will be working on legislation creating an optional federal insurance charter, "particularly for life insurers."

He said the committee's first priority would be working on legislation establishing a systemwide risk regulator covering all forms of financial activity, and that the new systemic risk regulator, most likely the Federal Reserve Board, will have "some flexibility to decide what the risk is."

At the same time, Rep. Frank said he would be working to shift oversight of derivative financial instruments from the House Agriculture Committee to his panel. In response to a question, he said he would leave regulation of commodities that "deal with edibles" to the agriculture panel.

Regarding the bond insurers, officials of the Association of Financial Guaranty Insurers, based in Albany, N.Y., appeared to be aware that such legislation might be in the works.

In a statement, Sean McCarthy, president and chief operating officer of Financial Security Assurance Inc. and chairman of AFGI, said, "AFGI looks forward to reviewing the legislation and we look forward to working with Chairman Frank."

In discussing the issue, Rep. Frank said he would be working with Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee, on the bond legislation.

He said general obligation bonds of states and bonds issued by states and municipalities to finance school construction and similar projects generally carry the full faith and credit of the states that issue them, and the decision of the monoline insurers to get involved in the credit default swap business had placed the insurers in jeopardy, unfairly raising the interest costs borne by the states and local governments.

Rep. Frank acknowledged that the monoline insurers might suffer as a result. He suggested that they could venture out into insuring revenue bonds, which in many cases don't carry a full faith and credit state guaranty.

Mr. Frank said he and Mr. Miller will be proposing an FDIC-type insurance system to insure general obligation municipal bonds backed by the full faith and credit of the states. Issuers would pay premiums to the insurer to cover the cost of potential failures.

"I believe we should have, for full faith and credit general obligation bonds issued by governments with full taxing power, a federal insurance program paid for by premiums," Rep. Frank said.

He said the insurance would have limitations, such as "some multiple on the amount of insurance they get, some limitation on the total budget."

Such a program would "substantially reduce the interest paid" by municipal bond issuers, Frank said.

Rep. Frank acknowledged that his panel will be undertaking a wide-ranging agenda.

Regarding flood insurance, the current authorization for the program runs out March 6. He said the Finance panel would use the period before the authorization expires "to get some changes" in the Senate bill that Sen. Richard Shelby, R-Ala., ranking minority member of the Senate Banking Committee, is insisting be the basis for long-term reauthorization and reform of the program.

Cliston Brown, a spokesman for the Property Casualty Insurers Association of America (PCI), said concerning the flood insurance program that PCI looks forward to working with Congress to identify positive solutions, such as how to address the program's debt and enhance mitigation efforts.

"We do remain strongly opposed to the addition of windstorm coverage to the program because it is unnecessary and almost certainly harmful to the program's solvency," Mr. Brown said.

Blain Rethmeier, a spokesman for the American Insurance Association, said, "An extension is the most prudent action given the current environment and the focus on the economic crisis."

Regarding the OFC, Rep. Frank said he would leave the issue of future regulation of insurance to Rep. Paul Kanjorski, D-Pa., chairman of the panel's Capital Markets Subcommittee.

"I will let Kanjorski figure it out," he said, implying that he will allow Rep. Kanjorski to deal with the politically charged issue that has divided the various parts of the insurance industry.

Rep. Kanjorski held several hearings on future regulation of the insurance industry during the last Congress and introduced last June legislation, H.R. 5840, that failed to pass the House floor in September that would have created an Office of Insurance Information within Treasury.

One incentive for federal regulation of insurers, Mr. Frank noted, is that European regulators have been pushing for the U.S. to establish an OFC.

He also said he would work to restore balance between federal and state regulators on consumer protection issues, saying the Bush administration pushed federal preemption of state regulators too far.

He said another consumer protection tool being considered is creation of a Financial Product Safety Commission.

On the systemic risk legislation, Rep. Frank said he hoped he would have a general outline of how it will work by April, in time for the G-20 meeting which President Barack Obama is due to attend.

He said that hedge funds and credit rating agencies will be evaluated as part of discussions to create a systemic risk regulator.

This article was updated Feb.4, 11:49 a.m.