Wednesday, March 26, 2008

US-backed banks to fill insurance breach

(Gillian Tett and Krishna Guha in the FT) The Federal Home Loan Banking system, a government-sponsored network of US banks, is seeking to enter the so-called “monoline” insurance market to help local governments that have been hurt by the credit market storm.

In particular, some banks in the network want to offer their top-notch credit ratings to municipal infrastructure projects – and thus fulfil the role traditionally taken by monoline insurance groups such as MBIA.

The move has been sparked by a recent crisis at the large monoline groups which has made it more ­difficult for local US governments to obtain credit guarantees – and thus raise funds.

“This [offer of credit support] would be to address a market failure, or an absence of the market – that is what Government State Enterprises [such as the FHLB network] are for,” John Price, president of the Federal Home Loan Bank of Pittsburgh, and current chairman of the 12-strong banking network, told the Financial Times.

“Essentially we would be lending our [credit rating] to small projects,” he said, stressing that the projects would be “things such as a $6m hospital deal, that type of size”.

The plans are likely to be welcomed by many local US politicians, since municipalities across the US have faced an unexpected funding crisis in recent weeks as a result of the monoline woes.

However, the move is also likely to trigger further debate about the degree to which policymakers are now turning to state, or quasi-state, entities to stabilise the financial sector – and thus replace market functions with public intervention.

The FHLB has already been propping up some large US lenders by making massive loans to these institutions, collateralised by their mortgages. On Monday the Federal Housing Finance Board, the FHLB’s regulator, announced an expansion of its role, by giving the system more freedom to raise purchases of mortgage-backed securities.

Mr Price yesterday insisted that the FHLB system was extremely conservative and thus unlikely to suffer any losses as a result of its expanded activity in the US mortgage market or financial system. “There is peer oversight. There has never been a credit loss in our system.”

However, he said that the FHLB had an ideological commitment to supporting local communities – and thus considered credit enhancement for municipal projects to be a natural extension of this. New legislation is needed before this step could occur, Mr Price said. A bipartisan group of senators and congressmen is preparing this.

“Municipal finance has been shaken because of the hits to the monolines so what we have been pushing for with congress is a deal that would enable member banks to offer credit enhancement to issues,” Mr Price said. “Almost all of the banks [in the FHLB network’] have been supporting this.”

After a frantic round of capital-raising the biggest bond insurance groups Ambac and MBIA have averted a cut in their triple-A credit ratings. The bond insurers essentially lend their ratings to municipalities and other issuers for a fee and losing the top rating would undermine their business model. Confidence in the biggest bond insurers remains fragile. Ambac and MBIA continue to trade at levels more usually associated with companies that are likely to default.

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