The Department of Transportation plans to create a new, federally chartered bond insurer that would guarantee transportation-oriented municipal issues, according to sources familiar with the plan.

In 1991, the transportation sector amounted to more than 9% of the municipal market. A spokesman at the Department of Transportation confirmed the proposal for the Department of Transportation Financing Association, tentatively dubbed "Dottie Fae."

"Such an idea has been raised, and it's being discussed internally throughout the entire department," the spokesman said.

The transportation proposal comes at a time when the private financial guarantee market is already fending off expansionary moves by College Construction Loan Insurance Association -- the congressionally mandated corporation now backing education bonds.

Connie Lee is attempting to change its charter so it can insure A-rated credits, which would improve its book of insured bonds and expand its potential line of business. Private insurers, most notably Financial Guaranty Insurance Co., have contested the move as a blatant example of public entities interfering with a thriving private sector market.

Now, it appears, the Department of Transportation is about to mount flanking maneuvers for the respective municipal sectors.

The growth rate of new issuance in the municipal transportation sector is one of the attractions leading to the consideration of Dottie Fae. Over the past four years, transportation new issuance has increased an average of 28%, acording to Securities Data Co./Bond Buyer.

Ann C. Stern, president and chief executive officer of FGIC, has challenged the motivation behind Connie Lee's proposed charter amendment and enlisted the aide of parent company General Electric Capital Corp. in lobbying against it. She said, in effect, that federal corporations are like wolves in sheep's clothing.

"FGIC seriously questions the long-term implications of additional federal corporations," Ms. Stern said. "In fact, we believe this merely serves as a prelude to having these rumored federal corporations seek expanded underwriting authorization beyond the market originally identified as needing assistance.

"And that puts them where Connie Lee is today: Attempting to compete directly with private monoline insurers, absent a compelling need for additional market access," she added.

Officials at Connie Lee declined comment.

Other insurance executives were cautious about the proposed federal corporation, saying they had not yet seen the Dottie Fae plan.

Robert R. Godfrey, executive vice president at Municipal Bond Investors Assurance Corp., pointed out that the U.S. Treasury, much like to the private sector, needs to be prudent with its funds. Mr. Gottfried participated in the drafting of Connie Lee's enabling legislation.

"The federal government has a finite amount of resources," he said. "They have to make sure that it's actually needed. Anything that's to be started should require an in-depth study.

"Is there a serious need that the market is not fulfilling?" he asked. "It's my gut feeling that you've got some very high-quality [transportation} issuers that aren't having any problems at all with market access."

The federal corporation concept is gaining momentum in Washington, according to government professionals, because the structure is an efficient way to sidestep the regulatory quicksand and political infighting that can paralyze existing agencies.

Thomas H. Stanton, a Washington-based attorney who last year published a book on government-sponsored enterprises and federal corporations, said that in the past few months he has been approached by three separate federal agencies interested in setting up government corporations to carry out public purposes.

"The government corporation idea is in vogue," Mr. Stanton said. Government corporations "are increasingly being perceived as useful tools that are not encumbered with the traditional restraints of government agencies," he added.

He declined to name the agencies who contacted him.

Market participants suggested that the Environmental Protection Agency might be mulling a federal corporation to guarantee pollution control bonds, but spokespeople for the agency were unaware of such a plan.

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