Congress eyes bond insurers amid housing crisis
WASHINGTON (Reuters) - The widening U.S. housing finance crisis prompted calls in Congress on Thursday for new scrutiny of bond insurers and credit raters, while Senate Democrats offered a rescue plan for troubled homeowners.
As the government scrambled to deal with a credit crunch now spreading beyond its origins in the mortgage market, New York Sen. Charles Schumer called for federal regulation of the $2.4-trillion bond insurance industry.
Major bond insurers such as MBIA Inc (MBI.N) and Ambac Financial Group Inc (ABK.N) are a source of growing concern on Wall Street as their credit ratings come under pressure due to their involvement with risky mortgage-backed securities.
"I am considering introducing legislation that would regulate them," Schumer said at a Senate Banking Committee hearing focused on the state of the economy and the markets.
In a separate hearing in the House of Representatives, New York Gov. Eliot Spitzer told lawmakers problems must be fixed to avoid a "financial tsunami." New York regulators are working on a plan to help bond insurers.
Also on Thursday, Moody's Investors Service cut its top "AAA" ratings on FGIC Corp's bond insurance arm, citing its weakened capital position. FGIC is owned by a group that includes mortgage insurer PMI Group Inc (PMI.N) and private equity.
Fears of wider economic damage resulting from problems in the little-known bond insurance business stem from its role in backing municipal bonds issued by local governments to finance essential public projects such as schools, roads and parks.
For many years, bond insurers specialized solely in standing behind municipal bonds, but they moved increasingly into the mortgage-backed debt business during the housing boom and now many of the securities they insured are in trouble.
EXPOSURE SEEN
A senior SEC official told lawmakers that some large investment banks have "material" exposure to bond insurer risk, but the SEC considers their capital and liquidity sufficient.
The agency is looking closely at bond insurer risk at five large U.S. investment banks under its jurisdiction: Bear Stearns Co Inc BSC.N, Goldman Sachs Group Inc (GS.N), Lehman Brothers Holdings Inc LEH.N, Merrill Lynch & Co Inc MER.N and Morgan Stanley (MS.N).
Schumer said the legislation he may introduce would regulate bond insurers "when they do get involved in other types of activities -- at least have some kind of federal oversight greater than we have now."
Federal Reserve Chairman Ben Bernanke, testifying before the committee, responded cautiously to Schumer's proposal.
"I am not quite sure which additional powers you would have in mind," said the Fed chairman, pointing to a deeper problem of distressed assets underlying the securities that the bond insurers chose to stand behind.
"The best way to address this issue is strengthening the underlying economy," said Bernanke. Continued...
