Representative Frank was critical of the current bond rating system used by ratings agencies, stating that municipal bonds are held to an unfairly high standard because the ratings agencies take into account other factors, such as the state of municipal government, instead of focusing solely on the municipality’s ability to pay back the debt. Noting the safety of municipal bonds, he stated that “making municipal bond issuers buy default insurance is like making a vampire buy life insurance.” It is uncertain whether the bill will pass in this year’s shortened legislative season. Representative Richard Neal, D-Mass., co-sponsor of the bill, said in relation to the bill that “what might not pass this year may well become a priority next year.”
Municipal Bond Fairness Act Introduced
Representative Barney Frank, D-Mass., introduced a bill on June 19 that would place increased regulatory scrutiny on bond insurers and require one rating standard for both municipal and corporate bonds. The Municipal Bond Fairness Act, as the legislation is named, would require municipal bond insurers to submit information about their operations, including their financial soundness, risk management and underwriting standards in an effort to prevent the type of exposure currently faced by the monoline bond insurers as a result of the subprime credit crunch of the last 12 months. The Municipal Bond Fairness Act would also require ratings agencies to use one standard to rate both corporate and municipal bonds.