No Need for Bailout, Bond Insurer Tells Congress
By The Associated Press
Published: February 14, 2008
WASHINGTON (AP) — A major bond insurer told Congress on Thursday that it has adequate capital to survive industrywide distress and that neither a bailout nor tighter federal regulation is needed.
New York regulators are working with bond insurers and banks to ease financial strains in the bond insurance industry — strains that government officials say threaten to hurt communities, individual investors and the wider economy. But an official of MBIA, one of the biggest bond insurers, said in testimony to a House panel that a rescue plan is unnecessary.
“The notion of a ‘bailout’ of highly creditworthy companies who, at most, are at risk of losing the very highest ratings available is misplaced,” MBIA’s chief financial officer, Charles Chaplin, said in prepared testimony for a hearing by the House Financial Services subcommittee on capital markets.
“The company believes that MBIA is more than adequately capitalized to meet obligations to policyholders,” he said.
The chairman of Ambac Financial Group,, Michael Callen, said “stable and predictable” credit ratings by the agencies are needed to restore confidence in the industry.
The distress in the bond insurance industry, an offshoot of the subprime mortgage crisis, is spreading and could bring serious problems far beyond the financial markets, officials say. Lawmakers and regulators are concerned that a collapse of the bond insurers — which back the funding for hospitals, schools and other public works — could deliver another glancing blow to already battered banks and force higher taxes on homeowners.
The risk that the insurers — including MBIA, Ambac and the Financial Guaranty Insurance Company — could lose their top-notch credit ratings comes after world stock and credit markets have already been shaken by billions of dollars in losses tied to high-cost subprime mortgages.
Speaking of municipal bonds, Gov. Eliot Spitzer of New York told the subcommittee, “Millions of average Americans, who own bonds either directly or through mutual funds, and who viewed them as a low-risk investment, have lost or potentially could lose money even though the underlying bonds have not defaulted.”
Also affected could be the cost of college loans, state and local taxes, and museums’ budgets, he said.
Credit market turmoil that started last summer with rising defaults among risky mortgage loans has spread to new corners of Wall Street. The latest hit has been to short-term investments called auction-rate securities — a popular way for companies, municipalities and pension plans to store their cash. Some of those investments are backed by the troubled bond insurers.
In recent weeks, periodic auctions held to determine the interest rate for these bonds have found few — if any — buyers as investors have shied away from all but the safest places to put their money.
The House panel’s chairman, Representative Paul Kanjorski, a Pennsylvania Democrat, has raised the issue of whether tighter regulation of the bond insurance industry may be needed.
The insurers write policies that promise to cover payments to bondholders if the entity that issued the bonds defaults.
Wall Street rating agencies recently have downgraded or threatened to cut some bond insurers’ financial strength ratings, saying that the companies — which make payments on bonds when the issuer is unable to do so — lack sufficient extra cash to cover a potential spike of billions of dollars in claims. The downgrades have led to a series of problems for municipalities that buy the insurance to make investments in infrastructure and other projects more appealing to investors.
In New York, Insurance Superintendent Eric Dinallo has been working with Wall Street firms and other market players on a rescue plan for troubled bond insurers. He told the House panel that he is considering a plan to split the bond insurers in two to protect municipal policyholders from problems in other parts of the companies’ businesses.
And on Tuesday, the billionaire investor Warren Buffett said he would help out the bond insurance industry by offering a second level of insurance on as much as $800 billion in municipal bonds.
Federal regulators, including officials of the Federal Reserve and the Securities and Exchange Commission, told the subcommittee they are closely watching developments.
“The Federal Reserve has been carefully monitoring and assessing the channels through which deterioration in the financial condition” of the bond insurers “could adversely affect financial stability,” Patrick Parkinson, deputy director of the Fed’s research and statistics division, said in his prepared testimony.
Source: NYT
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