California May Create New Bond Insurer to Rival Buffett’s

March 28, 2008

California Treasurer Bill Lockyer is exploring the possibility of having state pension funds create a new bond insurer, his spokesman said Thursday.

Lockyer has no immediate plans to use Berkshire Hathaway’s new bond insurance unit following congressional testimony earlier this month by Ajit Jain, the head of the Berkshire unit, said Tom Dresslar, the spokesman for the California treasurer.

In his testimony, Jain defended using different ratings for municipal and corporate issuers that created the need for bond insurance, Dresslar said.

Lockyer is trying to change this double-rating system because it drives up borrowing costs for states and local governments. He also wants state pension funds to pressure Standard & Poor’s to modify how it rates municipal bonds.

Berkshire, run by billionaire investor Warren Buffett, entered the municipal bond insurance sector this year after a request from the New York insurance superintendent following the collapse of investor confidence in the existing insurers.

Buffett saw the new venture as an attractive opportunity, but California might prove a tough market.

“The treasurer’s view is — unless we get a word from Mr. Buffett that he doesn’t share the view expressed in Mr. Jain’s (testimony) we won’t have any interest in doing business with Mr. Buffett’s insurance company,” Dresslar said.

Spokesmen for Berkshire Hathaway and Standard & Poor’s had no immediate comment.

Also on Thursday, California’s insurance commissioner, Steve Poizner, said in a statement he approved Buffett’s new bond insurer in a swifter than usual fashion because there are too few companies, a problem he termed a “capacity issue.”

Jason Kimbrough, the insurance commissioner’s spokesman, said that if the California Public Employees’ Retirement System, or Calpers, were to soon create a bond insurer it too might be swiftly approved for a new license.

“If they did this rather quickly and the market conditions were very similar to what they are right now, we would most likely expedite it like we did for Berkshire Hathaway,” he said.

But Calpers might have to clear a California regulatory hurdle that governs an agency of the state or government owning an insurer. “I think Calpers may have some additional stipulations they would have to meet,” Kimbrough said, adding he did not yet have more details on this provision.


Lockyer also wants state pension funds to pressure Standard & Poor’s to change its municipal rating policy to equalize state and government debt ratings with corporate ratings.

Credit agencies have historically used a different rating scale for the $2.6 trillion municipal bond market to allow investors to better compare the relative riskiness of tens of thousands of tax-exempt bond issuers.

But this practice often resulted in municipal bonds getting lower ratings than corporate bonds with equivalent default risk, raising borrowing costs for state and local governments.

Standard & Poor’s stands behind its present rating system. The agency said last week that municipal investors widely understand its method and that municipal bonds are already rated higher than corporate bonds, with 99 percent of all munis considered investment grade.

Moody’s Investors Service and Fitch Ratings have taken steps to address issuers’ concerns and are weighing whether to harmonize their muni and corporate rating systems.

Dresslar said Lockyer has had preliminary discussions about the new bond insurer with the $235 billion Calpers, which is the biggest U.S. pension fund. The treasurer will also pursue this proposal with the California State Teachers’ Retirement System, or Calsters.

Lockyer is a board member of Calpers, which holds 1.8 million shares of Standard & Poor’s owner McGraw-Hill, Dresslar said. The California treasurer also is a board member of Calsters, but Dresslar did not know how many McGraw-Hill shares it owns.

About half of all municipal bonds are insured but U.S. states, cities and towns increasingly are skipping this protection because investors now shun their debt unless it is backed by the very few insurers who did not imperil their top-notch ratings with profit-eating subprime plays.

Since tax-free bonds have such a low default rate of less than 1 percent, insuring this type of debt can be both exceptionally profitable and low risk, credit agencies say.

(Additional reporting by Joan Gralla) (Editing by Jan Paschal)

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