The proposal, suggested by the subcommittee's chairman, Rep. Paul Kanjorski of Pennsylvania, received open discussion with New York state Insurance Superintendent Eric Dinallo, who appeared before the panel's inquiry into the state of the bond insurance sector. The home state regulator for several of the largest monoline insurers, Dinallo has taken the lead in negotiating talks among major commercial banks exposed to potential bond insurer downgrades, and told Kanjorski that congressional intervention could prove "very helpful."
"If we could have a line of credit of $10 billion, my instinct is that more capital would come in before that, because you'd have the line of credit in place, and I think there would be an increasingly less likelihood you'd even need the line of credit, ironically," Dinallo said.
Financial guaranty insurers cover losses from specified financial transactions, guaranteeing investors in debt instruments timely principal and interest payments in the event a default occurs. Historically focused on insured bonded municipal debt, several of the sector's major writers have been stung in recent months by their exposure to collateralized debt obligations, and other asset-backed structured products tied to the housing market.
Though representatives of the two largest monolines -- MBIA Inc. and Ambac Financial Group Inc. -- both told Congress explicitly that their sector does not need a government bailout and that both firms retain adequate claims-paying ability to cover even very pessimistic modeling scenarios, Kanjorski indicated strong interest in putting at least a temporary backstop in place to ease market volatility.
"Because the stimulus went through as quickly as it did, I'm a little bit under the impression that we're going to get unusual cooperation from Treasury and the White House," Kanjorski said.
Dinallo also conceded that state regulators, accustomed to monitoring firms for solvency, may have underestimated the importance of ratings in the monoline sector.
"Solvency in the insurance world is a very simple question -- it's your ability to pay claims as they come due," Dinallo said. "I think we could regulate more towards the rating in the monolines, because it turns out that the rating is maybe as important as the solvency of the company, when you're linking everyone's Wall Street activity to it."
Among the other potential legislative actions Kanjorski outlined were prohibiting bond insurers from guaranteeing complex structured financial products; creating a federal bond insurance corporation modeled after the Federal Deposit Insurance Corp.; allowing federal home loan banks to compete with bond insurers by issuing letters of credit to municipalities; and mandated federal insurance supervision for the monoline sector.
The proposal for federal supervision was seconded by Rep. Ed Royce, R-Calif., cosponsor of the National Insurance Act, which proposes an optional federal charter system for the life and property/casualty sectors. Royce noted that while the committee had solicited testimony from federal banking and securities regulators whose regulated entities were affected by the bond insurance crisis, there was no equivalent federal expert who could offer insight into the operations of the market.
Qualified support for some federal supervisory role in insurance even was offered by a particularly notable state-level official, New York Gov. Eliot Spitzer, who noted that when he went before Congress in 2004 to discuss his investigation of anticompetitive steering by commercial i