Congress Decries Municipal Bond Ratings

"The public sector is paying the price," Rep. Barney Frank said at hearing. Ratings agencies have held municipalities to higher standards than corporations, lawmakers said. (By Susan Walsh -- Associated Press)
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By Donna Borak
Associated Press
Thursday, March 13, 2008

Cities, towns and governments -- and taxpayers who live in them -- have been "unfairly penalized" with high-risk ratings on their municipal bonds, House lawmakers said yesterday.

"The public sector is paying the price," Rep. Barney Frank (D-Mass.) said at a hearing of the House Financial Services Committee, which he chairs. Congress may have to step in to make sure the price is fair, other lawmakers suggested.

State officials contend that the three biggest ratings agencies -- Standard & Poor's, Moody's Investors Service and Fitch Ratings -- have cost taxpayers billions of dollars in added interest and bond insurance charges by holding municipalities to higher standards than corporations.

If the same rating scale were used for both corporate and municipal markets, most muni bonds would have a high enough credit rating that insurance wouldn't be necessary, Frank said.

The hearing was prompted by a campaign led by California Treasurer Bill Lockyer to change the way bonds are rated. In a March 4 letter to Moody's, S&P and Fitch, signed by 11 state treasurers and four other municipal and state issuers, Lockyer said municipalities "have paid enormous sums to buy bond insurance."

Lawmakers underscored the drain on states and cities, which have $2.6 trillion in outstanding debt, as they looked for ways to plug it.

They have "stolen billions, if not trillions, of taxpayers dollars from their pockets," said Rep. Michael E. Capuano (D-Mass.).

The top Republican on the committee, Rep. Spencer Bachus of Alabama, called for swift action on the part of Congress before "too much damage is done."

Part of the problem flows from the agencies' dual credit-rating system that appears to have saddled state issuers of municipal bonds with a high-risk rating. Municipal bonds, which have traditionally been considered one of the safest investments, are more likely than corporate bonds to receive a rating lower than AAA, Lockyer said in prepared testimony.

Senior managing director for Moody's Project and Infrastructure Finance Group, Laura Levenstein, said it is re-evaluating the municipal rating system and considering a global rating system similar to that used for gauging corporate bonds.

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