U.S. Treasury Optimistic on Bond Insurance Solution

February 21, 2008

The U.S. Treasury Department is optimistic that problems in bond insurance will be worked out and progress is being made, a senior Treasury official said Thursday.

Treasury Undersecretary for Domestic Finance Robert Steel told the Reuters Housing Summit he was encouraged that various groups with an interest in the bond insurance market — from the New York state insurance regulator to the insurers — are communicating.

“It’s a good long list of people who are adjacent to this issue. The good news is that it seems all of those people are speaking,” he said. “There are lots of incentives for people to figure this out, and it seems to my mind, progress is being made and ideas are being shared.”

When asked if the insurance companies should recapitalize or be split into two businesses — one for municipal bond insurance and one for other forms of credit — he said that “from an intellectual view” he agreed with the first suggestion.

“Assuming that these are going to be ongoing entities, then they’ll need to have fresh capital,” he said.

Having insurance companies increase their capital has been suggested as one solution to the problems triggered when ratings agencies lowered or threatened to lower the major bond insurers’ “AAA” ratings.

Steel also said the U.S. Treasury was watching the auction-rate bond market with vigilance, after a string of failed auctions over the last several weeks.

(Reporting by Lisa Lambert and Kevin Drawbaugh; editing by Jeffrey Benkoe)

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