WASHINGTON–A congressional committee will wait until after the July 4 break to consider legislation requiring rating agencies to treat municipal bonds the same as corporate bond issues.
The measure, which the House Financial Services Committee has delayed action on until after the Independence Day holiday recess, would also task the Treasury Department with collecting information on mono-line bond insurers.
House Financial Services Committee Chairman Barney Frank, D-Mass., announced the delay at the outset of a markup of several pieces of legislation. He agreed to the delay, he said, in response to a request from Republican committee members who wished to further examine the bill, and because it had only been introduced late last week.
The bill, known as the Municipal Bond Fairness Act, or HR 6308, requires rating agencies to evaluate municipal bonds in the same way that corporate bonds are rated, particularly full faith and credit general obligation bonds.
Bonds of that type are backed by a municipality's taxation authority, and in cases where the municipality has difficulty paying, the state government will step in to cover the bonds, he said. Other municipal bonds are tied directly to a specific funding source such as tolls for a bridge crossing.
Additionally, a provision in the bill calls for the U.S. Treasury to collect data on municipal bond insurers, including their financial soundness, concentration, risk management and underwriting standards. The data could be used for further congressional action.
At the press conference where he introduced the bill, Rep. Frank said that municipalities were paying unreasonably high risk premiums on bonds that were highly unlikely to default, blaming the situation on “mono-line” bond insurers that sought to expand their offerings to other financial instruments and suffered the consequences of poor performance.
Should the data collected by the Treasury show what he saw as continued unfair treatment, Rep. Frank suggested at the press conference that the federal government could ultimately step in to provide insurance for the municipal bonds.
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