WASHINGTON -- On Wednesday night, College Construction Loan Insurance Association threw itself a party to celebrate its entrace into the municipal new-issue insurance market, but several questions about Connie Lee's future role in the market seemed to linger in the air.
Connie Lee's charter restricts it from insuring the top three tiers of bonds, which is generally understood to mean single-A credits and above. The municipal market must wait to see how aggressively Connie Lee pushes against this ceiling, but friction between it and the private sector is bound to crop up along the single-A border. Will Connie Lee go head-to-head with private firms?
Also, the municipal market will be tempted to treat Connie Lee, created by Congress in 1986, as other markets have treated other government-sponsored enterprises -- that is, as if the moral authority of the federal government stands behind its guarantee. Will this unbalance the education sector of the market?
The answer to the first question will depend on how willing Congress is to discipline its own offspring. Comments from the featured speaker of the Connie Lee affair -- Rep. William D. Ford, D-Mich., chairman of the House Committee on Education and Labor -- indicated that Congress fully expects Connie Lee to behave.
"We doomed you to always taking some bad paper," Rep. Ford said, addressing Oliver R. Sockwell, president and chief executive officer of Connie Lee. "You will never be able to fight without one hand tied behind your back."
Rep. Ford will be instrumental in maintaining the line between single-A education bonds and what Connie Lee can insure. He has been responsible for Connie Lee's entire family tree: He helped write the Higher Education Act of 1965, which created the Department of Education, contributed to the founding of the Student Loan Marketing Association in 1874, and played a major role in Connie Lee's 1986 charter.
Sallie Mae owns 35% of Connie Lee; the Department of Education own 15%: and private investors own half.
There was the sense in Rep. Ford's remarks that he was thankful to municipal participants for not resisting Connie Lee's charter more than they did in the mid-1980s.
"I thought we might be on to something of the guys in the private sector were worried, [and] you did give me a very hard time," he said. "But fortunately, [resistance] evaporated rather soon."
Indeed, after deeming the battle lost, market participants -- notably Municipal Bond Investors Assurance Corp. -- quickly joined up with Connie Lee and made it "the largest provider of reinsurance for education bonds in this country," according to Mr. Sockwell.
Mr. Sockwell was careful not to alienate MBIA, which stood behind approximately 90% of Connie Lee's business in 1989. "MBIA joined with us to craft and modify the legislation," he said, referring to the enabling charter. "They became our largest and most important customer."
The future relationship of the two firms will be an interesting thing to watch, attendees noted, given that MBIA insured about 35% of the higher education bond sector in 1990. MBIA was represented Wednesday by David H. Elliott, its president and chief operating officer.
The second question, whether Connie Lee bonds will outprice privately insured credits, must await the test of time. But several municipal and federal officials at the Connie Lee dinner strongly suspected that the new force in the market will get a trading advantage.
To some extent, one municipal market veteran pointed out, the industry is a victim of its own success. A glut of insured paper -- or at least a plentiful ongoing supply -- is a fundamental reason for the market's trading values hovering in the A-plus to double-A minus range. Some insured bonds trade only slightly higher than unadorned credits, he said.
Connie Lee, as a result, will be entering a market already penalized by traders and investors refusing to recognize the full value of triple-A ratings. Connie Lee's federal charter, even though downplayed by Mr. Sockwell and other Connie Lee executives, is likely to be perceived as implied federal backing.
Should the market establish Connie Lee as a better credit? No more, observers say, than AMBAC Indemnity Corp.'s stock should be penalized when Citibank declares sour earnings (in fact, the stock gained 1/2 point). In both cases, the apron strings have been cut. On both Capitol Hil and Wall Street, however, perception is reality.
It will not be surprising, then, if Connie Lee hits the ground running, if its insured bonds immediately climb into the double-A trading range where Freddie Mac, Fannie Mae, and other siblings compete.
Such a prospect is not that daunting to the bond insurers. No one will voluntarily cede market share, but as long as Connie Lee stays within the narrow band of triple-B credits, the maximum damage would be less than 10% of the market.
If Connie Lee crosses the single-A line, on the other hand, the polite coexistence cultivated over the past five years will become war. And Mr. Ford can expect a few more phone calls.
