College Construction Loan Insurance Association is trying to get its charter amended so it can insure education bonds rated A or better, which would put the congressionally enabled insurer in direct competition with the private financial guaranty industry.
The firm, known as Connie Lee, has enlisted lobbyists to petition the House and Senate committees on higher education to add broad "loopholes" to the firm's charter, according to insurance industry executives.
And a battle is shaping up. Financial Guaranty Insurance Co. is tapping the considerable weight of its owner, General Electric Capital Corp., to counterattack the Connie Lee lobby. Connie Lee is currently precluded from the A-rated sector by a clause in its enabling legislation.
"Connie Lee's current effort is to amend their authority to insure A-rated institutions," said Ann C. Stern, president and chief executive officer of FGIC. "We do not have any evidence whatsoever that that sector of the market is not being served by private industry."
A FGIC spokesman said the bond insurer "has the support of GE" in the effort to stop the amendment as proposed.
Oliver Sockwell, president and chief executive officer of Connie Lee, declined to say why an amendment was necessary, but issued a prepared statement concerning the amendment.
"Congress is currently reviewing... whether existing federal law meets current education industry needs for credit enhancement," the statement says. "Connie Lee will take all actions necessary to comply with changes in law which may result from the congressional review process."
Just last month, Mr. Sockwell told a meeting of the Municipal Analysts Group of New York that Connie Lee will not compete head-to-head with the private bond insurance market for education credits.
The bond insurance market is leery of direct competition with Connie Lee because the firm is perceived to have the implied backing of the federal government.
The most recent version of the amendment would insert a clause into Section 752(c)(1) of the Higher Education ACt of 1986. It opens the way for Connie Lee to insure any education credit "with a higher rating if such institution has been declined for coverage by at least three unaffiliated insurers (listed by a nationally recognized statistical rating agency at the highest rating. . .) authorized to write financial guaranty insurance."
The amendment has been approved by the House of Representatives, according to an official with Rep. William D. Ford, D-Mich., chairman of the House Committee on Education and Labor. The Senate bill does not as yet contain a version of the amendment, he added.
Connie Lee's lobbyist witht the Washington, D.C-based firm of Williams & Jensen, Winkie Kriegler, also did not return phone calls.
Ms. Stern pointed out several problems with the current language, saying that both the rating agency and insurance company specifications are too vague.
"The language does not require that the insurance company does this business in the first place," she said. "If you have a company that does only structured finance business, they could still decline and it would count" under the proposed legislation.
But more importantly to Ms. Stern and other industry executives, the attempt to insure A-rated bonds runs in direct contravention of Connie Lee's original public purpose.
"As it is written, there are loopholes," Ms. Stern said. "Unless the amendment is consistent with the spirit of the original legislation, it seems to us that any change should only permit Connie Lee to write business where the private insurance is not serving the educational institutions.
"We have no evidence that the A-rated sector is not being served," she added.
Michael Djordjevich, president and chief executive officer of Capital Guaranty Insurance Co., said the amendment underscores the fallibility of bringing any government-oriented entity into the private sector.
"I philosophically don't accept the premise of the way Connie Lee has been set up," Mr. Djordjevich said. "They set it up ostensibly because private enterprise didn't want to insure the lower credits. If that premise is correct, then they should stay at that level. They want to do higher credits, so the premise is wrong.
"The concept is flawed," he added. "This is the typical approach of any socialist scheme. Today, single-A, tomorrow double-A credits, and the day after tomorrow the world."
Another insurance executive said congressional consideration of an amendment that increases the federal role in a market that is widely considered to be very competitive contradicts one of the mainstays of the Republican White House -- less government.
"It's ironic that [with] Reagan and Bush taking government out of as many private sectors as possible that a development like this is allowed to take place," he said. "It would seem to fly in the face of what President Bush did when he [recently] put a freeze on increasing federal imvolvement."
Ms. Stern noted that if the private monoline bond insurance market were to decline a single-A bond, the industry would have no qualms about Connie Lee's participation. On the other hand, the market is so aggressive now that such an instance may not exist.
"I see no harm in legislation if it can be written in such a way as to ensure that Connie Lee" insures neglected credits, she said. "But we've repeatedly tried to get from the supporters of this legislation evidence that A-rated institutions have found themselves shut out of the industry, and we have not been able to find a single such transaction."
After being created in 1986, Connie Lee reinsured municipal exposure, primarily with Municipal Bond Investors Assurance Corp. and Bond Investors Guaranty.
Officials at MBIA, which bought BIG's portfolio in late 1989, declined to comment on Connie Lee's proposed charter amendment.
Market participants suggested that Connie Lee may be motivated by a rating-oriented conundrum: To maintain its AAA from Standard & Poor's Corp., the firm must withstand higher capital charges stemming from the firm's mandated lack of diversification, which in turn lowers the firm's return to shareholders.
Richard Smith, managing director at Standard & Poor's, said Connie Lee's AAA has not been in danger and that its rating methodology was developed with the lack of diversification in mind.
"When we evaluated their proposal, we determined that this a business plan that could support the rating," Mr. Smith said. "There are disincentives [to having only hospitals and higher education bonds], even within the investment grade spectrum, but we didn't devise these numbers trying to push Connie Lee in the direction" of A-rated credits.
