As the United States cautiously emerges from its deep recession, significant constraints on economic growth remain.
One stumbling block, the inability of many small and midsize businesses to obtain bank loans, is well known. But another worrisome trend is getting less attention: The market for municipal bond insurance remains in crisis.
Municipal bond insurance may be the forgotten stepchild of the economic crisis. Once vibrant and competitive, the municipal bond insurance market as recently as 2006 insured more than half of all municipal bond offerings. This year, however, that share has dwindled to 10% because, as noted in an Oct. 16 article in The Bond Buyer (a SourceMedia publication), essentially only one company is writing business in "a market that only two years ago had seven viable players."
Municipal bond insurance serves a crucial function in the municipal securities market, which is used by state and local governments, hospital boards and other tax-exempt entities to fund shovel-ready projects ranging from bridges and schools to hospital wings and community parks. Insurance provides comfort to investors that a third party will make timely principal and interest payments on their bonds should the need arise, and it also reduces an issuer's borrowing costs.
Troubles in this market have for a while undermined the stimulus and recovery efforts in different ways. In May, a Florida official told a congressional committee that the crisis had either constricted access to the market or increased interest costs to issuers. J. Ben Watkins, the state's director of bond finance, said the problems were "affecting state services to taxpayers and preventing many infrastructure projects from moving forward."
The ripple effects are hitting both job seekers and taxpayers. When governments pay more to borrow because of insufficient capacity in the bond insurance market, the potential grows for delays or cost escalation in infrastructure projects. And if projects become more expensive, citizens must either pay more in taxes or accept fewer services. Clearly, taxpayers would benefit from the additional capacity that more competition in the bond insurance market would bring, just as municipalities would enjoy greater market access and lower funding costs.
Trouble in the municipal bond insurance market is not a reflection on the market itself. Rather, these companies suffered collateral damage from their exposure to products created and sold by large banks, especially packages tied to subprime mortgages that came to be known as "toxic assets" and triggered the economic crisis. As a result, these insurance companies have seen their ratings downgraded or have ceased operations entirely. Large banks, many of which got taxpayer funds under the Troubled Asset Relief Program, have even contributed to the problem by suing the New York State Insurance Department and one large insurer.
President Obama has said that his administration is committed to providing relief to municipal issuers, including housing finance agencies. And legislation introduced in Congress has also focused attention on the municipal bond industry by stressing its importance to our economy's vitality. But with the legislation stalled, legitimate doubts have arisen about whether congressional action will solve the problem.
The president's comments and the legislation recognize that this crisis, brought on by market turmoil not caused by local governments, has negatively affected smaller issuers and others for whom insurance is so important.
During this time of economic uncertainty, we need to work together to help local communities reduce their borrowing costs, move forward with important projects and avoid unnecessary budget cuts.
Establishing a robust municipal bond insurance industry is a prerequisite for building a stronger foundation for our economy. Revitalizing the industry would let the municipal credit market serve the pent-up demand for credit products that can help state and local governments fund projects. Normality would give taxpayers billions of dollars in savings on borrowings — and support the nation's economic recovery.