Hearing of the Capital Markets, Insurance, and Government Sponsored Enterprises Subcommittee of the House Committee on Financial Services - State of the Bond Industry

REP. GREGORY W. MEEKS (D-NY): Thank you, Mr. Chairman, and I'd like to welcome my governor from the great state of New York, it's always good to see you and be with you.

I just have a couple of quick questions for you, Governor. Just the basic of questions. I'll get your opinion on how at-risk do you believe municipal bond assets are, right now?

MR. SPITZER: I think --- first, it's always great to see you, Mr. Meeks, Congressman --- I would say the municipal market is as stable now in terms of the creditworthiness of the underlying securities as it ever has been.

And as you will hear repeatedly, the default rate is de minimis within that market, and therefore, I think investors should take great comfort from the fact that their holdings in that area are secure.

REP. MEEKS: I don't know maybe this happens, Mr. Capuano, when I walked in. In your opinion -- because I heard you talking about regulatory steps et cetera -- the regulatory, this is do or do not do, one of the questions I had for you is what steps did you think the federal government should do to support and to address the effects of downgrading for bond insurers.

MR. SPITZER: Well, I think that the concern we have about a downgrade for the bond insurance entities is that it would then have a cascading effect that would effect the market evaluation of an enormous volume of bonds that are in the marketplace.

What we therefore think the first and best step to undertake is the recapitalization of the bond reinsurance companies so that they do not themselves get downgraded.

In the absence of that Chairman Kanjorski has raised, at one extreme, the possibility of a federal guarantee that would come in to reassure the marketplace that these bonds are not in fact going to default.

At the other end of the spectrum, one can imagine lesser steps such as the creation of new insurance entities and Mr. Dinallo has very effectively sought the entry of other potential participants, whether it is Berkshire Hathaway's offer to buy the muni part of the book of these companies or something between that and a full federal guarantee.

REP. MEEKS: And lastly , Governor, Mr. Buffett made an offer the other day about putting in an underwriting reinsurance policy of about $800 billion of municipal bonds. My question is good move/bad move, what do you think of his offer?

MR. SPITZER: I'm not --- I would be loathe ever to second guess Mr. Buffett, but I think I would state it this way. The fact of the offer has been very affirmative for the marketplace, because what it has done is demonstrate to municipal bond holders and the municipal marketplace that there is as a backstop always the possibility of this division of the businesses and to what's referred to as the good back/bad bank. So that you could split off the municipal part of it, which is secure, and find a guarantor to lend stability to that marketplace.

It is not perhaps the optimal result because it would be preferable to have the entire bond insurance market stabilized without taking away the municipal part of it from the other piece of business. Not --- making sure, as your colleague from Massachusetts suggested, that there not be a substitute that goes for municipalities over to the other part of the businesses also, I think, a legitimate governmental objective.

And so while we are happy that there is the offer from Mr. Buffett and arguably others could step in based upon their own valuation of that business, we are also hopeful that there could be a resolution that does not require that sort of division.

REP. MEEKS: Thank you, Mr. Governor. I yield back.

(BREAK IN TRANSCRIPT)

REP. MEEKS: Thank you, Governor. Let me start first with a question to my superintendent from the state insurance Mr. Dinallo, what do you think that the state regulators like yourself did right or wrong with respect to the bond insurers?

MR. DINALLO: Well, what I think we've done right is we identified an issue and immediately got on top of it, I think well before many other people were confronting the issue, and we've done our best this year to highlight the issue, and come up with solutions. And in -- particularly private side potential solutions and dealing with it.

I think if we were to criticize what we did wrong, as I said before, I think we emphasized solvency, which is what we're supposed to be doing, but here it turns out that a AAA rating is really important, and I guess, we could regulate more to the rating as opposed to the pure solvency question.

That's not something that historically we've done; I don't think frankly a federal or a state or other regulator would necessarily do that, but here where you've got such interconnectivity, it's not just a claims paying question, it does turn out to be a ratings question.

And if I could just clarify something that I said before, because I can see that we're starting to wind down. I was just -- in responding to Chairman Kanjorski's question about what the federal government could do, and I know he was on CNBC today talking about sort of the FDIC type backstop, I think we should, first of course, go for a private sector solution. And we've been trying to facilitate that, and that's what the entirety of my efforts have been about.

Following that, one goes to sort of a good book bad book scenario, and then you get to the Berkshire Hathaway question, which is who seeks to reinsure or buy that good side of the book, and that is the point, and all I was saying was that if Congress wants to do that or even the states altogether, the municipalities could reinsure themselves technically, certainly Zhei Zhang's offer is very -- it's a very appreciated offer, although any experts will tell you, it's a very profitable offer for Berkshire Hathaway, and there might be a better solution so to speak, a cheaper solution, to worry about the good side of the book, if we can't get to any other scenario including what I hope is, as we're speaking, private side solutions coming to fore.

REP. MEEKS: Okay. Let me -- Mr. Mayor, I was listening to your testimony, and as -- as you stated -- and in many cities, you know, talking about infrastructure problems now, going into debt, because of the foreclosures on homes, and they're limited in what their resources are, and what their alternatives are to -- other than raising taxes, et cetera.

Off the beaten path, just a little bit, but I know that the Senate is doing an investigation into sovereign wealth funds. But you know, in Indiana, for some infrastructure problems, they had utilized some sovereign wealth funds to do roads and highways et cetera for the infrastructure.

I -- wanted to get your opinion, would something like that be, given the crises that we have, an option for cities like yours to look into, to try to help offset some of the financial debt that they -- that the city's currently in?

MR. LEIGHTON: We're always looking for different sources to help us with the debt. And just last month I attended the conference of mayors here in Washington and listened to all the mayors talk about the infrastructure across this country.

Especially, they talked about the bridge that collapsed in Minnesota. And it -- what it appears is that throughout the United States, the aging infrastructure is affecting not only smaller cities like Wilkes-Barre, but bigger cities like Minneapolis, and the problem we're having is that there is insufficient revenue sources to fix the aging infrastructure. So we are always looking for alternative ways of reducing our debt and increasing our revenue sources, so --

REP. MEEKS: And my last question would be to Mr. Sirri, basically, following up the governor's question. So long as you know, we look at this crisis, the question of transparency is a big issue and -- listening to your answer. And I'd like to know, you know, whether or not you think that there's a role for a group like the New York Stock Exchange to play in the transparency issue, something that they may be able to do in that regard?

MR. SIRRI: Well, there could be a -- conceivably a role for any number of entities that choose to collect and report, disseminate information. I think the question you have to ask very carefully of this market is, to what extent would dissemination of an information help the problem?

Largely, in this space, one of the problems were there were simply no trades. In the space of CDOs starting in early 2007, trades just didn't occur, there were no prices. So I think here although, transparency is often helpful, I think it's a difficult analysis, and it would take some other -- some additional work to determine whether the -- to what extent that would help solve this exact problem.

But I would note that there are a number of mechanisms that are available to disseminate such information. The New York Stock Exchange, I think, might be one of them. The TRACE system I mentioned earlier would be another, and there may yet be some private sector solutions that would fulfill --

REP. MEEKS: Thank you. I want to thank all of you, you know, and again, on behalf of the chairman, as he did, apologize for the delay, the panel is now dismissed, and we would like to welcome our third panel.

(New panel)

REP. MEEKS: Good. Okay. I guess, we'll hear from first, Mr. William Ackman, the managing member of the Pershing Square Capital Management. Mr. Ackman would present for five minutes.

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