The next time Rhode Island taps the capital markets to help clean up its credit union mess, it may have the option of using a federal guarantee to back as much as $180 million of taxable bonds.

But the guarantee, contained in banking legislation now making its way through Congress, would come with steep fees and unmanageable collateral requirements that insurance provided by the private sector does not have

"Right now, it is not contemplated that we will be taking advantage" of the guarantee, one state official said, on the condition he not be named. "Even though the legislation is being sought, even though it appears that there is a possibility that it may pass, the way it is drafted would make it very difficult to take advantage of," he added.

Sen. John Chafee, R-R.I., introduced the guarantee plan as an amendment to the Comprehensive Deposit Insurance Reform and Taxpayer Protection Act. He was one of several U.S. lawmakers who sought to secure a federal guarantee for Rhode Island in the wake of a credit union crisis that came to light Jan. 1, when Gov. Bruce G. Sundlum moved to close 45 privately-insured financial institutions.

Sen. Chafee's amendment, contained in the banking legislation that Capitol Hill observers said Senate leaders were hoping to bring to a full vote last night, would guarantee the loan in the state's next credit union borrowing, expected to be a $140 million bond offering sometime in the next several months.

The senator's guarantee provision did not draw opposition from other states' lawmakers since it would cost nothing to provide, Rhode Island delegation staffers said.

In fact, according to a Senate report on the bill, the state would have to pay the federal government $7 million over 10 years for providing a guarantee on $180 million of borrowing.

And if the state borrowed by issuing bonds, they would have to be taxable under an Internal Revenue Code provision.

A few exceptions to that provision have been carved out, notably for bonds backed by Federal Housing Administration-insured mortgages. But the bills being considered by Congress for the Depositors Economic Protection Corp. would create no exception to that rule.

State officials and market sources say privately if the guarantee is a bargain for the federal government, it may not be such a good deal for Rhode Island and the state's independent, bond-issuing agency, the Depositors Economic Protection Corporation, that is overseeing the credit union clean-up.

Under Sen. Chafee's proposed guarantee, the corporation would have to set aside about half of the very assets it needs to make depositors whole. According to Richard H. Gaskill, the corporation's executive director, deposits of $983 million are still frozen in 10 shuttered saving institutions.

In addition, the state would also have to pledge any leftovers of the 1/2% of the state's 7% sales tax that raises money for the corporation's outstanding bonds.

What the stringent collateral requirements, the fees, and the taxability would add up to is a raw deal for Rhode Island, municipal market participants say. Neil G. Budnick, a senior vice president at the Municipal Bond Investors Assurance Corp., said any insurer could offer a guarantee more favorable to the issuer.

"Any insurer would do that with a better rate," Mr. Budnick said. He described the terms of the federal guarantee -- which, unlike bond insurance, would guarantee the underlying loan rather than the timely payment of principal and interest to investors -- as "really onerous.

MBIA insured the $149.9 million deal the depositors corporation brought to market in June, charging the corporation $1.831 million, or a little over 1%, for the enhancement, compared to the 3.8% in fees the Chafee plan calls for.

Despite that, Mr. Geskill said he was reluctant to criticize the Senate legislation. "At this stage in the game, there's not a practical alternative on the table to the federal guarantee," he said.

Hope still exists that the bill that emerges from a House-Senate conference committee, expected as early as next week, will have less costly collateral requirements. "The bill, in its final form, will probably be something that can be useful," Mr. Gaskill said. The House and Senate could take their banking bills to conference committee as early as next week.

The current House proposal, sponsored by Rep. John F. Reed, D-R.I., sets no level for collateralization, according to the congressman's chief of staff, J.P. Poersch. It also requires the pledged assets have ratings of only double-A quality. The Senate bill, meanwhile, not only requires collateral equal to 2 1/2 times the outstanding loan principal, but also requires the collateral be triple-A quality.

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