NCOIL Hears Proposals For Fed-Funded Mutual Bond Insurers

NU Online News Service, July 15, 3:55 p.m. EDT

The National Conference of Insurance Legislators (NCOIL) heard proposals at its latest meeting for the establishment of mutual bond insurance companies that would be financed by the federal government.

The competing proposals, for a government alternative to financially troubled private bond insurers, came from the National League of Cities (NLC) and HRF Associates, LLC, a consulting services firm dedicated to the financial services industry.

Susan Nolan, executive director of NCOIL, said NCOIL simply heard the proposal and has not discussed the matter further.

Cathy Spain, director of enterprise programs for the NLC, said NLC gave just a brief overview of its business plan, as time was short at the NCOIL meeting since a discussion on credit default swaps ran long. She acknowledged there was not much in the way of response from NCOIL, and added NLC was there only to inform NCOIL about the proposal.

Ms. Spain said NLC has spoken with lawmakers' offices on Capitol Hill, as well as the Treasury Department and people in the Obama administration.

The NLC said in a statement that its proposal would call for establishing the Issuers Mutual Bond Assurance Company (Issuers Mutual), a mutual bond insurance company owned by state and local government bond issuers "that will provide readily available and affordable municipal bond insurance." The company would attempt to replace commercial municipal bond insurers "whose credit ratings were downgraded in 2008 and 2009," the NLC said.

Issuers Mutual would attempt to secure $5 billion in capital through the government's Troubled Asset Relief Program, or perhaps from a second stimulus package, should that be forthcoming, Ms. Spain said.

The NLC said the $5 billion would comprise $3 billion of cash up front, and $2 billion of call capital. The company would also seek "a small amount of funding for start-up working capital."

Citing the need for the company, the NLC said, "Throughout 2008 and 2009, the market was devastated by the downgrades of every single municipal bond insurance company. These downgrades brought on the utter collapse of the Auction Rate Securities market and the disruption of the Variable Rate Demand Note market. These events, in turn, cost state and local government bond issuers billions of dollars in added interest payments."

The absence of any "triple-A"-rated insurers has also complicated access to the market for many small or infrequent municipal bond issuers, NLC said.

Ms. Spain said the new entity would not be profit motivated, would seek tax exempt status, and would be "very competitive" on pricing.

She added responses to the proposal have been generally positive from bond issuers and members on Capitol Hill. The Treasury Department "has not said yes or no" regarding the $5 billion in capital, she added.

Ms. Spain said opposition has come from potential competitors, citing Assured Guaranty–which recently completed an acquisition of Financial Security Assurance Holdings–as an example.

A spokesperson from Assured said, "Assured believes that the bond insurance industry can more effectively serve cities and states than a governmental agency based on our deep credit and structuring capabilities, as well as the value of our guaranty. Further, financial guaranty is a risk that does not lend itself to a mutual approach as the risk is catastrophic and different for each municipality. We would, however, welcome governmental support in the form of reinsurance, which would give our industry additional capacity to provide stability and liquidity to the U.S. municipal market."

For its part, HRF sought to differentiate its plan to create Monitor Assurance Corporation from NLC's plan. HRF's Monitor Assurance would seek $25 billion in initial capital from the federal government as opposed to $5 billion.

The funds, according to Bob Smith, executive vice president of HRF, would not require any additional legislation and would come from TARP.

HRF said, "Capitalized at $5 billion, the NLC plan requires the creation of a federal reinsurance program in order for the company to insure transactions of larger insurers."

The statement adds, "This reliance on the federal government backing will lead to confusion in the public's mind as to whether the NLC-led company is an implicit GSE."

HRF also said Monitor Assurance would have the capital strength to insure a wider range of risks than the NLC proposal, which is limited to municipal bonds rated investment grade by the rating agencies.