Here is the lead of a story we carried on page one last week: "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."
What this translates to, ultimately and inevitably, is: taxpayers, hold on to your wallets.
Connie Lee, as it is know acronymically, was originally created by Congress in 1986. It is owned 50% by private investors, 35% by the Student Loan Marketing Association, and 15% by the U.S. Department of Education. It has a federal mandate to insure only those credits rated below the top three tiers of credits -- those the other bond insurers usually don't want to touch.
Connie Lee is somewhat like the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., and like its owner, Sallie Mae, which are government-sponsored enterprises. It has the perceived backing of the federal government, and a triple-A rating. If losses on its portfolio of insured securities mount, its owners, including the U.S. government - including the taxpayers - will presumably provide more capital.
An argument can be made, of course, that Connie Lee, in seeking to insure higher-rated credits that the private insurers may refuse (although apparently there is not a documented instance of this yet), is seeking simply to upgrade its portfolio, and make it safer and more profitable for its owners - and taxpayers. What I see in this pitch to insure higher-rated credits, however, is a very natural attempt to move up a little higher on the food chain. And thus the government, not private enterprise, is eventually put on the line for more and more credit risk. The risk is being socialized.
Connie Lee began life with a mission to get construction capital to deserving colleges that for one reason or another might not qualify for insurance, but who are deemed important from a public policy standpoint, by insuring their tax-exempt construction debt. As a friend of mine has written, "A lot of basic research in the sciences is not immediately profitable or commercially viable, but it is nevertheless very important."
I return to a column I wrote back on Nov. 25, 1991. I asked, of Connie Lee, "Will it serve a quasi-public purpose and help colleges with lower ratings tap the market, or will it go after the entire school market? In so doing, will it drive out private capital from the market? ... The real question is: What will Connie Lee add to the market except more competition and more 'market-share' pricing?"
One of the questions has been answered. Connie Lee, one way or another, wants to go after the entire school market.
Philosophically, many people have a problem with that. As News Editor Nick Boyle reported in his story on Connie Lee last week, "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."
As one of his sources noted, "It is 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. It would seem to fly in the face of what President Bush did when he [recently] put a freeze on increasing federal involvement."
Not only philosophically, but financially, is this proposal suspect. Municipal bond insurance premiums have been squeezed steadily for the past few years, and more competition will undoubtedly depress them further. Connie Lee can be expected to heat up the competition further, thanks to the perception of federal backing, trade better than the market. The solution for an insurer going head to head? Still lower premiums. Lower premiums now mean that those nice returns the insurers are banking now will decline in future years.
Weasel Words
Connie Lee's proposal has been approved by the House, and now is being mulled by the Senate.
All too often in our nice, cozy industry, people have very good criticisms of the way things are, but will not go public with them. This brings to mind the famous line about capitalists selling the rope with which they would be hanged. The private municipal bond insurers have the most to lose from a big Connie Lee, and are leery of a federally-backed gorilla in their market, but up until now have been very quiet about their opposition. At last one firm, Financial Guaranty Insurance Co., and its owner, General Electric Capital Corp., has begun a counteroffensive.
Connie Lee, for its part, is using Sallie Mae's own lobbyist, someone named Winkie Kriegler of Williams & Jensen, to push its proposal. When pressed by our Mr. Boyle, Oliver Sockwell, president and chief executive officer of Connie Lee, would not say why a bigger Connie Lee would be better, but issued a statement to the effect that Connie Lee would "take all actions necessary to comply with changes in law which may result from the congressional review process."
These are weasel words. Connie Lee seems to be engaged in empire building, pure and simple. Congress should not aid and abet such building, and should be wary about the further socialization of credit risks.
