Bloomberg News

House's Kanjorski Reviewing Bond-Insurer Downgrades (Update1)

January 24, 2008

U.S. Representative Paul Kanjorski is reviewing bond insurers to determine how potential cuts to credit ratings at MBIA Inc. (MBI:US) and Ambac Financial Group Inc. (ABKFQ:US) may affect cities' ability to raise money.

``The recent-bond insurer downgrades and the possibility of more on the horizon'' may ``have the potential to affect all aspects of the financial marketplace,'' Kanjorski, the Pennsylvania Democrat who leads the House Capital Markets Subcommittee, said in a statement today. He plans to review possible ``ricochet effects on municipal governments.''

Kanjorski will hold a hearing next month on the bond- insurance industry, according to the statement. He sent letters to the Federal Reserve, the U.S. Securities and Exchange Commission and state insurance regulators seeking ``feedback.''

The review reflects concern that bond insurers' woes could spread to Wall Street securities firms and municipalities, further disrupting financial markets. New York Insurance Superintendent Eric Dinallo met with the U.S.'s biggest financial institutions yesterday in an effort to persuade them to rescue bond insurers by raising capital.

Downgrades of bond insurers may reduce the value of $2.4 trillion of debt the companies guarantee, spawning losses and writedowns on top of the $133 billion already posted by the world's biggest banks and security firms.

Ambac Downgrade

New York-based Ambac lost its AAA grade from Fitch Ratings this month on concerns losses from subprime-mortgage assets it insures may increase. Fitch lowered Security Capital Assurance Ltd.'s AAA ranking today, threatening the ratings of at least $154.2 billion of securities.

Ambac and Armonk, New York-based MBIA insure bonds sold by cities to finance municipal projects. Amid the U.S. housing boom, the companies sold insurance to protect against the default of securities backed by mortgages.

``I am especially concerned about the implications for state and local governments that rely on bond insurance when putting together deals to pay for roads, schools and other construction projects,'' Kanjorski said in his letters.

He sent them to Dinallo, Federal Reserve Chairman Ben S. Bernanke, SEC Chairman Christopher Cox, Federal Reserve Bank of New York President Timothy Geithner, Comptroller of the Currency John Dugan and National Association of Insurance Commissioners President Sandy Praeger.

Wisconsin Commissioner of Insurance Sean Dilweg and Maryland Insurance Commissioner Ralph Tyler also received letters. Ambac is primarily regulated by Dilweg's state and ACA Capital Holdings Inc., a bond insurer that lost its investment- grade rating in December, is registered in Maryland.

Kanjorski asked regulators to address ``problems'' facing bond insurers, whether current industry regulations are sufficient and steps they are taking to monitor firms and ``protect investors.'' He asked for responses by Feb. 1.

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.

To contact the editor responsible for this story: Otis Bilodeau in New York at obilodeau@bloomberg.net.


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Companies Mentioned

  • MBI
    (MBIA Inc)
    • $9.6 USD
    • 0.32
    • 3.33%
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