The Spitzer Legacy: Bond Issues
The other thing Spitzer did in Washington
Mon, 14 Apr 2008 16:17:00
A lot of attention has been spent and will continue to be spent on what Eliot Spitzer was up to at the end of the day on Feb. 13 in Room 871 of the Mayflower Hotel.
But officially, at least, Spitzer was in Washington to kick off his Valentine’s Day morning with testimony to Congress, using his prominence as governor to warn of an impending massacre of the municipal bond market.
Municipal bonds themselves were solvent, Spitzer explained, and local governments were in no danger of defaulting on the promises made to municipal bond holders. But, he told the Capital Markets Subcommittee, the financial instability at monolines—insurance companies that underwrite municipal bonds—threatened to damage the credit ratings at these insurance companies. Without reliable insurance, municipal bond credit ratings would devalue, increasing the difficulty and expense of local governments’ efforts to issue bonds and raise money.
Day 1-Day 442: The Spitzer Legacy
Full coverage on NYCapitolNews.com...
• Spitzer's Wake
• Now Who Would Get the Senate Seat?
• Silda Wall Spitzer’s Effects and Michelle Paige Paterson’s Prospects
• Questions Swirl Over Which Firms Stand on Solid Ground
• In Alabama, a Lieutenant Governor who Became Governor, then Lieutenant Governor Again
• The Next Step for the Career Cut Short
• Once Governor, Always Governor
• Signs of Change
• Bond Issues
That afternoon, State Insurance Superintendent Eric Dinallo stepped in to explain the nuts and bolts needed to avert disaster. The issue is of particular concern for New York, where most insurance companies are incorporated and regulated, Dinallo said, reflecting on why he and the then-governor brought their case to Congress.
“I think that there is a good-faith discussion to be had about whether there ought to be federal backstops for municipalities,” Dinallo said.
Dinallo believes that Congress could have effectively ended the municipal crisis by simply following a comment made by Financial Services Committee chair Rep. Barney Frank (D-Massachusetts), and making a $10 billion guarantee to ensure no municipality defaulted on its obligations.
“That’s all that the market needed,” Dinallo said.
Issuing bonds is a common way for local governments to raise money, but the credit rating for those municipal bonds determines how much it is going to cost local governments to pay the bonds back when they mature or come due. The better the rating—AAA being the best—the easier for a government to raise money without raising taxes. The question of the ratings could effect many billions of dollars in New York and other local governments across the country.
Frank did not commit the federal government to be a guarantor, but Dinallo and Spitzer found the needed money anyway by facilitating $7 billion dollars worth of fresh capital into the monoline industry to stabilize credit ratings.
With the immediate security that insurance underwriters were not going to collapse provided, Dinallo turned his attention to new regulations specific to the monoline industry. Noting how much monolines rely on their credit ratings, Dinallo saw what he says is an important difference between them and most insurance companies, which base their financial strength on how much capital they have available to pay off claims. By selling what is essentially their good names, monolines are particularly susceptible to sudden dips in investor confidence.
“What we never really focused on was that for these few insurance companies, out of the thousand that we regulate, was that their rating was part of the business model,” he said. “They were selling their rating.”
On March 14, the day Spitzer announced his resignation, Dinallo testified before the Assembly Insurance Committee, outlining new regulatory proposals designed to restore confidence in the companies. If adopted, these would prevent monolines from underwriting certain types of collateralized debt obligations.
Dinallo said he plans to have new regulatory proposals fully ready by the middle of the year.
Congress has been taking what happened on the morning of Feb. 14 more seriously than anything that might have happened the night before, Dinallo believes. He laughed off concerns that Spitzer’s personal problems diverted focus from the issues in their testimony.
“To be fair to them, they’ve spent a lot of time on this,” he said. “I think that they’re taking it very seriously.”
Dinallo expects to testify again in front of Congress in April, but said he has yet to discuss any of the issues with new Gov. David Paterson (D).
Meanwhile, Assembly Insurance Committee chair Joseph Morelle (D-Monroe) is in the process of determining if new legislation is needed to ensure that municipal bonds are backed up with reliable insurance.
“What I want to make sure we don’t do is come up with a solution that is unique to this problem, and miss the larger question,” Morelle said.
Morelle said that could prompt him to call a second round of Assembly hearings on the rating agencies’ processes. Dinallo believes the Assembly should instead hold hearings about how important these agencies are to businesses in the state.
“The problem is, before we all trash the ratings agencies, I’d like to know who would have done it better? It’s not like Bear Stearns got it right, and they’re a bunch of experts, the last time I checked,” Dinallo said. “Maybe Larry Fink of Blackrock would do it better, but the last time I checked, he’s paid a bit too much to come work for a ratings agency.”
Morelle insisted that his only goal was to fix the problems going forward, and not to assign blame for what has passed.
“I’m not really interested in sort of an ‘I gotcha’ sort of thing,” he said. “I don’t want to fight the last war; I want to fight the next war.”
But the last war might not be over just yet. On April 4, Fitch Ratings—one of the three major American ratings agencies—downgraded the rating of giant Wisconsin-based insurance company MBIA to AA.
Day 1-Day 442: The Spitzer Legacy
Full coverage on NYCapitolNews.com...
• Spitzer's Wake
• Now Who Would Get the Senate Seat?
• Silda Wall Spitzer’s Effects and Michelle Paige Paterson’s Prospects
• Questions Swirl Over Which Firms Stand on Solid Ground
• In Alabama, a Lieutenant Governor who Became Governor, then Lieutenant Governor Again
• The Next Step for the Career Cut Short
• Once Governor, Always Governor
• Signs of Change
• Bond Issues
But officially, at least, Spitzer was in Washington to kick off his Valentine’s Day morning with testimony to Congress, using his prominence as governor to warn of an impending massacre of the municipal bond market.
Municipal bonds themselves were solvent, Spitzer explained, and local governments were in no danger of defaulting on the promises made to municipal bond holders. But, he told the Capital Markets Subcommittee, the financial instability at monolines—insurance companies that underwrite municipal bonds—threatened to damage the credit ratings at these insurance companies. Without reliable insurance, municipal bond credit ratings would devalue, increasing the difficulty and expense of local governments’ efforts to issue bonds and raise money.
Day 1-Day 442: The Spitzer Legacy
Full coverage on NYCapitolNews.com...
• Spitzer's Wake
• Now Who Would Get the Senate Seat?
• Silda Wall Spitzer’s Effects and Michelle Paige Paterson’s Prospects
• Questions Swirl Over Which Firms Stand on Solid Ground
• In Alabama, a Lieutenant Governor who Became Governor, then Lieutenant Governor Again
• The Next Step for the Career Cut Short
• Once Governor, Always Governor
• Signs of Change
• Bond Issues
That afternoon, State Insurance Superintendent Eric Dinallo stepped in to explain the nuts and bolts needed to avert disaster. The issue is of particular concern for New York, where most insurance companies are incorporated and regulated, Dinallo said, reflecting on why he and the then-governor brought their case to Congress.
“I think that there is a good-faith discussion to be had about whether there ought to be federal backstops for municipalities,” Dinallo said.
Dinallo believes that Congress could have effectively ended the municipal crisis by simply following a comment made by Financial Services Committee chair Rep. Barney Frank (D-Massachusetts), and making a $10 billion guarantee to ensure no municipality defaulted on its obligations.
“That’s all that the market needed,” Dinallo said.
Issuing bonds is a common way for local governments to raise money, but the credit rating for those municipal bonds determines how much it is going to cost local governments to pay the bonds back when they mature or come due. The better the rating—AAA being the best—the easier for a government to raise money without raising taxes. The question of the ratings could effect many billions of dollars in New York and other local governments across the country.
Frank did not commit the federal government to be a guarantor, but Dinallo and Spitzer found the needed money anyway by facilitating $7 billion dollars worth of fresh capital into the monoline industry to stabilize credit ratings.
With the immediate security that insurance underwriters were not going to collapse provided, Dinallo turned his attention to new regulations specific to the monoline industry. Noting how much monolines rely on their credit ratings, Dinallo saw what he says is an important difference between them and most insurance companies, which base their financial strength on how much capital they have available to pay off claims. By selling what is essentially their good names, monolines are particularly susceptible to sudden dips in investor confidence.
“What we never really focused on was that for these few insurance companies, out of the thousand that we regulate, was that their rating was part of the business model,” he said. “They were selling their rating.”
On March 14, the day Spitzer announced his resignation, Dinallo testified before the Assembly Insurance Committee, outlining new regulatory proposals designed to restore confidence in the companies. If adopted, these would prevent monolines from underwriting certain types of collateralized debt obligations.
Dinallo said he plans to have new regulatory proposals fully ready by the middle of the year.
Congress has been taking what happened on the morning of Feb. 14 more seriously than anything that might have happened the night before, Dinallo believes. He laughed off concerns that Spitzer’s personal problems diverted focus from the issues in their testimony.
“To be fair to them, they’ve spent a lot of time on this,” he said. “I think that they’re taking it very seriously.”
Dinallo expects to testify again in front of Congress in April, but said he has yet to discuss any of the issues with new Gov. David Paterson (D).
Meanwhile, Assembly Insurance Committee chair Joseph Morelle (D-Monroe) is in the process of determining if new legislation is needed to ensure that municipal bonds are backed up with reliable insurance.
“What I want to make sure we don’t do is come up with a solution that is unique to this problem, and miss the larger question,” Morelle said.
Morelle said that could prompt him to call a second round of Assembly hearings on the rating agencies’ processes. Dinallo believes the Assembly should instead hold hearings about how important these agencies are to businesses in the state.
“The problem is, before we all trash the ratings agencies, I’d like to know who would have done it better? It’s not like Bear Stearns got it right, and they’re a bunch of experts, the last time I checked,” Dinallo said. “Maybe Larry Fink of Blackrock would do it better, but the last time I checked, he’s paid a bit too much to come work for a ratings agency.”
Morelle insisted that his only goal was to fix the problems going forward, and not to assign blame for what has passed.
“I’m not really interested in sort of an ‘I gotcha’ sort of thing,” he said. “I don’t want to fight the last war; I want to fight the next war.”
But the last war might not be over just yet. On April 4, Fitch Ratings—one of the three major American ratings agencies—downgraded the rating of giant Wisconsin-based insurance company MBIA to AA.
Day 1-Day 442: The Spitzer Legacy
Full coverage on NYCapitolNews.com...
• Spitzer's Wake
• Now Who Would Get the Senate Seat?
• Silda Wall Spitzer’s Effects and Michelle Paige Paterson’s Prospects
• Questions Swirl Over Which Firms Stand on Solid Ground
• In Alabama, a Lieutenant Governor who Became Governor, then Lieutenant Governor Again
• The Next Step for the Career Cut Short
• Once Governor, Always Governor
• Signs of Change
• Bond Issues
