UPDATE 1-U.S. Treasury plans new unit to monitor municipal market

Thu Apr 17, 2014 12:04pm EDT

(Recasts with confirmation from Treasury, details and background)

WASHINGTON, April 17 (Reuters) - The U.S. Treasury Department is forming a unit on state and local finance to coordinate its responses to developments in the country's $3.7 trillion municipal bond market, a Treasury spokesperson said on Thursday.

According to the spokesperson, J.P. Morgan's Managing Director for Public Finance Northeast Region and Housing Groups Kent Hiteshew will become director of the new unit in May.

Alongside liaising with state and municipal officials, the unit will monitor developments in the bond market and work on policies on public pensions. The unit, the establishment of which was first reported by the Wall Street Journal, will also develop policies for other pressing issues that emerge.

Nearly two years ago John Cross left his position as associate tax legislative counsel at Treasury, where he had spearheaded major municipal bond initiatives, to lead the Securities and Exchange Commission's municipal securities office. Since then, Treasury has spread its municipal finance activities among various departments.

The SEC is the market's chief regulator, but Treasury and the Internal Revenue Service can also intervene on municipal bonds. At the same time, Treasury runs bond and lending programs for states and local governments, such as the Build America Bonds created in the 2009 economic stimulus plan.

Since Cross left Treasury, Detroit filed the biggest municipal bankruptcy case in U.S. history and Puerto Rico's finances unraveled so much that last month the territory sold $3.5 billion bonds in the biggest municipal junk deal the market had ever seen. President Barack Obama is adamant the federal government will not bail out either issuer but his administration is also closely watching their financial states.

Federal agencies in general have recently increased oversight of the municipal bond market, mostly under the financial reform law known as Dodd-Frank. Over the last year the SEC has unleashed a torrent of enforcement that has set precedents on better disclosures from issuers and brokers and on protecting individual buyers. (Reporting by Lisa Lambert and Douwe Miedema in Washington; Additional reporting by Supriya Kurane in Bangalore; Editing by Gopakumar Warrier and Chizu Nomiyama)

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