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LEGISLATIVE PROPOSALS TO IMPROVE 

THE EFFICIENCY AND OVERSIGHT 

OF MUNICIPAL FINANCE 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MAY 21, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–37 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

May 21, 2009 ..................................................................................................... 1 

Appendix: 

May 21, 2009 ..................................................................................................... 61 

WITNESSES 

THURSDAY, MAY 21, 2009 

Allen, Michael M., Chief Financial Officer, Winona Health, on behalf of the 

Healthcare Financial Management Association (HFMA) ................................. 53 

Apgar, William, Senior Advisor to the Secretary, U.S. Department of Housing 

and Urban Development ...................................................................................... 11 

Beal, Bernard, Chief Executive Officer, M.R. Beal & Company, on behalf 

of the Securities Industry and Financial Markets Association (SIFMA) ........ 50 

Curry, Keith D., Managing Director, Public Financial Management Inc. 

(PFM) .................................................................................................................... 44 

Egan, Sean, Co-Founder and Managing Director, Egan-Jones Ratings Co. ....... 55 

Haines, Martha Mahan, Assistant Director and Chief, Office of Municipal 

Securities, U.S. Securities and Exchange Commission (SEC) .......................... 9 

Ispass, Alan B., PE, BCEE, Vice President and Global Director of Utility 

Management Solutions Practice, CH2M Hill ..................................................... 45 

Leppert, Hon. Thomas C., Mayor of Dallas, Texas, on behalf of the U.S. 

Conference of Mayors ........................................................................................... 14 

Levenstein, Laura, Senior Managing Director, Moody’s Investors Service ........ 42 

Marz, Michael J., Vice Chairman, First Southwest Company, on behalf of 

the Regional Bond Dealers Association (RBDA) ................................................ 40 

McCarthy, Sean W., President and Chief Operating Officer, Financial Security Assurance, Inc. .............................................................................................. 48 

Ochson, Mary Jo, CFA, Chief Investment Officer for the Municipal Bond 

and Tax-Exempt Money Market Investment Group, Federated Investors, 

Inc. ......................................................................................................................... 51 

Watkins, J. Ben, Director of the Division of Bond Finance, State of Florida ..... 17 

Wilcox, David W., Deputy Director, Division of Research and Statistics, Board 

of Governors of the Federal Reserve System ..................................................... 12 

APPENDIX 

Prepared statements: 

Bachmann, Hon. Michele ................................................................................. 62 

Connolly, Hon. Gerald E. ................................................................................. 63 

Allen, Michael M. ............................................................................................. 65 

Apgar, William .................................................................................................. 75 

Beal, Bernard .................................................................................................... 80 

Curry, Keith D. ................................................................................................. 89 

Egan, Sean ........................................................................................................ 91 

Haines, Martha Mahan .................................................................................... 103 

Ispass, Alan B. .................................................................................................. 120 

Leppert, Hon. Thomas C. ................................................................................. 123 

Levenstein, Laura ............................................................................................. 137 

Marz, Michael J. ............................................................................................... 149 

McCarthy, Sean W. .......................................................................................... 159 

Ochson, Mary Jo ............................................................................................... 168 

Watkins, J. Ben ................................................................................................ 174 

Wilcox, David W. .............................................................................................. 184 

Page

IV 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Letter from Hon. Ronald V. Dellums, Mayor of Oakland, California, dated 

May 27, 2009 ................................................................................................. 194 

Letter from Mark Anson, President & Executive Director, Investment 

Services, Nuveen Investments ..................................................................... 196 

Bachus, Hon. Spencer: 

Article from The Wall Street Journal entitled, ‘‘Muni Bonds Need Better 

Oversight,’’ by Hon. Arthur Levitt, Jr., dated May 9, 2009 ...................... 199 

Written statement of R.T. McNamar .............................................................. 201 

(1) 

LEGISLATIVE PROPOSALS TO IMPROVE 

THE EFFICIENCY AND OVERSIGHT 

OF MUNICIPAL FINANCE 

Thursday, May 21, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 9:30 a.m., in room 

2128 Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Waters, Watt, Sherman, Moore of Kansas, Capuano, Clay, McCarthy of New York, 

Baca, Scott, Green, Cleaver, Ellison, Perlmutter, Foster, Carson, 

Adler, Driehaus; Bachus, Castle, Royce, Manzullo, Jones, Biggert, 

Hensarling, Garrett, Neugebauer, Campbell, Putnam, Posey, Jenkins, Paulsen, and Lance. 

Also present: Representative Connolly. 

The CHAIRMAN. The hearing will come to order. I want to move 

quickly because at 2:00 this afternoon, the Secretary of HUD will 

be here to talk about the Voucher program, and we are glad to 

have him. That has to be a full committee hearing according to the 

practices of the House. We cannot have Cabinet officers testify before a subcommittee. So we will begin. 

This is a very important hearing on a subject that is not fully 

understood. Annually, in the broad category known as ‘‘municipal 

bonds,’’ which are government, State, local, and county, and nonprofit organizations, hospitals, they issue approximately $375 billion a year of bonds. We believe the evidence is overwhelming that 

they now pay, because of a set of arrangements, a higher interest 

rate than is justified by risk. That is particularly true of full faith 

and credit general obligation bonds in which there have been no 

defaults, according to Moody’s, in nearly 40 years. 

Ajit Jain, who is the insurance expert for Warren Buffet—and 

Mr. Buffet has said he does not know that he can keep the insurance business going without Mr. Jain—testified at that panel, at 

that table, that if municipal bonds were rated by the same criteria 

as corporate bonds, no one would sell bond insurance because it 

would become clear that it was not needed. In fact, to the extent 

that municipal bonds paid a higher interest rate in the past few 

years, it was because of mistakes by their insurers. 

The monolines, as they were called, used to just insure municipal 

bonds and then the monolines decided to take their sure-fire profit 

from insuring municipal bonds and insuring full faith and credit 

2 

general obligation bonds—I am going to borrow an analogy I have 

used elsewhere—is kind of like selling life insurance on vampires: 

You are insuring against an event that never happens. And when 

you are insuring against events that do not happen and are collecting premiums, you make a lot of money. 

The monolines then took that money from these insurance payments, from these municipalities, and speculated in collateralized 

debt obligation derivatives and lost money. As a consequence, a 

number of municipalities found the interest rates they had to pay 

went up because their insurers had gotten into financial trouble. If 

we could reduce by 100 basis points on the average the interest 

rates that are paid, that would mean $3.75 billion a year that 

would be saved by the issuers. 

People have asked, ‘‘Why are you doing this? What is the problem?’’ The problem is that taxpayers financing schools and roads 

and police stations and fire stations and other physical needs of our 

communities pay more in interest than would be justified by a better system. And people have asked, ‘‘Well, why are you interfering 

with the market?’’ Because, as we have learned in a number of 

other contexts, markets play a very important role but market failure is also a factor. 

And if you look at the rate of defaults in corporate bonds, and 

we have a slide that will show that, compare it to the rate of default in municipal bonds, you see a great disparity but that is not 

reflected in the rates. Part of it is the rating agencies, and we will 

be hearing from the rating agencies and from Moody’s. But if we 

were able to get an accurate picture reflected in the interest rates 

of the safety of municipal bonds, then you would have an enormous 

savings to the taxpayers. And it is hard some time to find the 

money to help municipalities. Here is a way that they are helped. 

They are helped because interest payments to private recipients 

would reduce. And let me say, I am speaking here against interest, 

recognizing that municipal bonds pay an unfairly high interest rate 

because the risk is exaggerated. 

I will now make my public statement, I am almost entirely personally invested in municipal bonds. And I have told the people 

who buy bonds for me to buy full faith and credit general obligation 

Massachusetts bonds, and the lower they are rated, the happier I 

am as a private citizen, although I am not happy as a public official, because I get more and more interest. And I escape paying 

about a 40 percent total tax between my Federal income tax and 

my State tax on bonds that will not fail. 

So what we have is a package of measures that we believe deal 

with that. It is also the case that there have been some problems 

with some financial institutions, particularly the non-full faith and 

credit, WPPS is an example in Washington State, where there have 

been some problems. Part of the problem has been the peculiarly 

political nature here of the relationship of advisors, etc., so one of 

our bills would greatly strengthen the rules, in fact it would create 

rules which do not now exist, for advisors to municipalities. So we 

both have an investor protection system here, but we also have 

what we think are a set of rules that will result in a market which 

now fully understanding what the value of municipal bonds is and 

3 

the low risk will result in a very substantial savings in taxpayer 

money on the part of State and local taxpayers. 

The gentleman from Alabama? 

Mr. BACHUS. Thank you, Mr. Chairman. And I thank you for convening this hearing to examine five legislative proposals designed 

to address problems in the $2.5 trillion municipal securities market. 

All of us are aware of the financial hardships that municipalities 

across the country are facing from declining tax revenues, depressed property values, and underfunded long-term funded pension and health care obligations. 

In my home State of Alabama, Jefferson County is on the verge 

on becoming the largest municipal bankruptcy in U.S. history 

caused, by the county’s inability to repay $3.9 billion in sewer bond 

debt tied to interest rate swaps, valued notionally at almost $6 billion. 

Some of my colleagues on the other side of the aisle believe the 

Federal Government can fix the municipal securities market with 

unprecedented interventions and bailouts. These interventions include reinsurance programs, for which no bond insurers may be 

able to qualify, and liquidity facilities that will increase the size of 

the Federal Reserve’s balance sheet. It is important to note that for 

years, municipalities opposed Federal intervention into their financing operations. Only now, when short-term financing options 

have dried up, are municipalities seeking assistance from the Federal Government. 

Mr. Chairman, of the measures that are the subject of today’s 

hearing, the legislation, your legislation to regulate unregulated 

municipal financial advisors is one that I could accept, with some 

changes. We are in agreement with the basic premise that the SEC 

should require individuals who advise municipalities to register as 

investment advisors. However, as demonstrated by the Bernie 

Madoff affair, I am not sure that the SEC, and I say, Chief Haines, 

with all respect to your Agency, I am not sure whether the SEC 

has a present ability to effectively examine existing investment advisors. In that regard, I wonder if it would not be appropriate for 

this committee to delegate this important examination responsibility to FINRA. 

Some of the other bills that we are considering today are more 

problematic, including legislation that could have the effect of forcing the rating agencies to rate municipal bonds triple A. It is wrong 

to assume that municipal bonds never default because they are 

backed by a taxing authority of the issuer. Moreover, I worry that 

any bill that directs the evaluation standards for credit rating 

agencies serves only to further solidify the government’s endorsement of the credit rating agencies when we should be moving in 

an opposite direction. 

Yesterday, we had a hearing on the credit rating agencies, and 

I made the statement there that I believe the credit rating agencies 

had failed spectacularly and their inability to properly rate securities I believe was a major contributor to the financial challenges 

that we are facing today. And I believe that the government’s endorsement of the credit rating agencies, and almost their what I beVerDate Nov 24 2008 13:08 Oct 19, 2009 Jkt 051596 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\51596.TXT TERRIE
4 

lieve has contributed to almost a duopoly in credit rating agencies, 

was a contributing factor. 

Also problematic is legislation that would create a Federal reinsurer of municipal bonds. Congress does not need to put the American taxpayer on the hook for more losses. The Federal Government should not be competing with private reinsurance companies 

that are active in the municipal bonds market, whether it is with 

these proposals today or in health care where there are more and 

more proposals for the Federal Government to assume private functions. I fear that we have already reached a point where government simply cannot afford the obligations that they have already 

assumed. And the more they assume, the higher all our taxes will 

go. 

The Treasury has no experience in providing reinsurance to municipal bond insurers or at pricing for reinsurance. In addition, a 

Federal reinsurance program for municipal bonds insurers simply 

bails out bond insurers that strayed from their core business of municipal financial guarantees and to much riskier financial products. 

Furthermore, a Federal reinsurance program may provide a competitive advantage to those legacy bond insurers that are unable to 

insure new municipal bonds because of their prior obligation. 

Finally, a Federal reinsurer may scare off new capital into the 

industry and undermine the long-term health of the bond insurance market. We should all keep in mind that a properly functioning bond insurance market helps smaller insurers to access the 

capital markets at more favorable rates. 

In conclusion, Mr. Chairman, I want to give the SEC real authority to oversee the municipal securities market, and I plan to introduce legislation to that effect or work with you on bipartisan legislation. The municipal securities market presents itself to the public 

as safe, stable, and secure for all investors. It should welcome more 

sunlight, consistency, and thorough disclosures that apply across 

the asset classes and commonsense modernization. 

Thank you to the witnesses for testifying today. I yield back the 

balance of my time. 

The CHAIRMAN. I thank the gentleman. I would just note that I 

believe 15 minutes for each side would be a reasonable allocation. 

I have used 5 minutes, and we have the gentleman at 61⁄2 minutes, 

so the gentleman has 81⁄2 minutes to allocate. I have 91⁄2 minutes. 

We are going to go on that basis. The gentlewoman from California 

is recognized for 3 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. I would like 

to begin by thanking you and Speaker Pelosi for your leadership 

in this area. We are facing an unprecedented crisis where our 

towns, cities, and States cannot obtain the funding they need to operate. One of the most distressed areas is my own State of California. 

We are here today in part because of the high costs municipalities must deal with when borrowing in the capital markets. Municipalities and States generally collect tax revenues twice a year, 

while they have to make payments to vendors, employees and government agencies 12 times a year. States use a combination of cash 

reserves and short-term notes to cover any shortfalls between the 

5 

two tax collection periods. However, issuing these short-term notes 

is not without significant cost. 

My own State of California has seen its borrowing costs on shortterm notes jump 88 basis points over the past years. For a municipality, this means nearly an additional $9 million in cost for every 

$1 billion that is borrowed. That is $9 million that could have gone 

into education or health care. Instead, it leaves the State coffers 

and leaves municipalities with the tough choice between cutting 

services or raising taxes. While California is currently the epicenter 

of this problem, we are neither the first nor the last State that will 

have an issue with municipal debt. 

In addition to high borrowing costs, some areas of our country 

have also been misled by so-called ‘‘municipal investment advisors.’’ 

These advisors often pitch financial products that end up costing 

a municipality more than it bargained for. As was mentioned earlier, in Jefferson County, Alabama, investment advisors even assisted the county in refinancing itself to the brink of bankruptcy. 

High borrowing costs, fast-talking pitch men and women, and 

dangerous products, such as credit default swaps, have proven to 

be a recipe for disaster. 

This hearing today and the legislative proposals of this committee are an important first step. 

Mr. Chairman, I look forward to hearing the perspectives of our 

witnesses. I thank you, and I yield back the balance of my time. 

The CHAIRMAN. The gentleman from New Jersey is recognized for 

2 minutes. 

Mr. GARRETT. Thank you, Chairman Frank, and Ranking Member Bachus, for holding this important hearing today. And I do 

want to compliment Ranking Member Bachus because he has been 

highlighting the problems in this industry for some time and also 

for his close attention to this important issue. 

The municipal bond market has experienced a tremendous 

amount of stress over the last year. Many States and municipalities are seeing their expenses rise as the spreads of their offerings 

continue to widen. So in an attempt to address some of the problems in this market, the chairman now has circulated a number of 

pieces of legislation. Well, I have significant concerns with several 

of these bills and the underlying rationale—that the Federal Government should always be the last resort for anyone in trouble. 

First, you have the Municipal Bond Liquidity Enhancement Act, 

which would provide the Federal Reserve with the authority to 

fund new liquidity facilities with a variety of specific securities. 

When Chairman Bernanke testified before this committee, it was 

last July, I asked him is there any limit on the Fed’s power under 

Section 13.3? He essentially told me no, there were no limits. So 

if that is the case, I am not sure why we need to pass a bill giving 

the Fed even more power that it already has. 

Secondly, regarding the Municipal Bond Insurance Enhancement 

Act, this legislation would create a temporary Federal Government 

reinsurance program for monoline insurance companies. I think we 

are familiar with the last time the Federal Government created a 

temporary reinsurance program, that program is still in operation 

and we just extended it. 

6 

So, in conclusion, once again the Federal Government is being 

called upon to bail out people who made bad decisions and this 

time it happens to be local and State politicians, who spent too 

much during the good times and refused to tighten their belts during the bad times. And I do not believe that we should pass any 

legislation that would de-incentivize States and localities from 

reigning in their bloated budgets and put more and more of that 

debt on an already over-loaded Uncle Sam. 

So I thank you, Mr. Chairman, and I yield back the remainder 

of my time. 

The CHAIRMAN. The gentleman from Georgia is recognized for 

21⁄2 minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman. First, I want 

to thank you for holding this hearing. And I also want to thank you 

for introducing such important legislation, and I am proud to cosponsor it with you, legislation that will provide much needed relief 

to State and local governments around the country by helping to 

unlock the parts of the municipal market that remain frozen. 

The creation of a liquidity facility to unfreeze the variable rate 

demand obligation and short-term debt markets is urgently needed 

and would allow projects like my City of Atlanta’s construction of 

the new Maynard Jackson International Terminal at HartsfieldJackson Atlanta International Airport in my district. It will allow 

the airport to continue without negatively impacting thousands of 

jobs; 2,600 construction jobs alone are tied to the International Terminal’s completion, which is scheduled for 2012. The viability of 

this and other similar projects, such as our City’s water system 

that will be idled if they continue to be unable to access the capital 

markets, depends upon State and local government access to affordable financing options. A lack of funding would cause construction to cease and several hundred workers will be idled if we are 

unable to access the municipal commercial paper market. 

Enhancing liquidity in the part of the State and local sector that 

remains stressed will not only help make that marketplace operate 

more efficiently but will help States and localities complete projects 

that are crucial to meeting public needs and consistent with job 

creation and economic stimulus. 

Mr. Chairman, at a time when the Federal Government is 

searching for ways to create jobs and stimulate economic activity 

and help to stabilize the financial markets, opening up the Federal 

Reserve liquidity facilities to variable rate and short-term debt obligation will help very much to address these goals. The cost of 

delay, particularly from the standpoint of jobs that are at risk, is 

too great. I look forward to the testimony of our distinguished witnesses. 

Thank you very much, Mr. Chairman, and I yield back my time. 

The CHAIRMAN. The gentleman from Delaware is recognized for 

11⁄2 minutes. 

Mr. CASTLE. Thank you, Mr. Chairman. I agree with most of the 

opening statements that we have just heard. It is clear to me that 

the municipal bond market has suffered and, like many other markets, is suffering more than usual because of the economic crisis we 

are in. And I think we should be concerned about the States and 

municipalities and the other entities that come under municipal 

7 

bond funding as well, our colleges and universities, for example, 

who are bond issuers and are experiencing higher costs. We obviously do not want those institutions to pass on those costs to students. We do not want hospitals to pass on costs to patients, other 

insurers or whatever it may be, so we need to pay attention to all 

of that. 

I am concerned about one of the provisions in the package of legislation that is before us which would expand the Federal Reserve’s 

emergency lending authority authorized under Section 13.3 of the 

Federal Reserve Act. The problem is that particular section some 

of us have been requesting more oversight and accountability on. 

Although it is clear that the municipal bond market is in need of 

assistance, as I have indicated, I question whether we should be 

willing to support such expansion of the Fed’s powers unless we 

also demand more oversight and accountability of the Fed. At the 

very least, GAO should be able to audit the Fed, as Representative 

Ron Paul’s Federal Reserve Transparency Act would do. 

But we have a problem here, I think we have identified the problem pretty well; now we need to identify the proper solution. And 

we thank all the witnesses for being here. We look forward to your 

testimony. I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas is recognized for 2 

minutes. 

Mr. GREEN. Thank you, Mr. Chairman. And I thank the witnesses for appearing today as well. Mr. Chairman, I am grateful 

that you have called these issues to our attention. This is a $2.6 

trillion market with 55,000 eligible issuers. It really is something 

that we need to take a look at. And in this time of adversity, I see 

a great opportunity for us to take affirmative action as well as corrective action. This should not be, and I do not think it is, an attempt to regulate the market. I really think that it is an opportunity for us to make some adjustments so as to prevent some conditions from occurring might be detrimental to the market. 

I am grateful that we are looking at this area of the advisors, financial advisors, persons, many of whom are unregulated. I think 

this is ripe for us to take a look at. And I look forward to working 

with you, Mr. Chairman, and others. I thank you, and I yield back 

the balance of my time. 

The CHAIRMAN. The gentleman from Texas, Mr. Hensarling, is 

recognized for 2 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. First, I want to 

take the opportunity to welcome my mayor to the Nation’s capital, 

the Honorable Tom Leppert, who is a great public servant doing 

many great things for the people of Big D. Welcome, Mr. Mayor. 

Having said that, we may differ on the subject matter of this particular hearing. 

Mr. Chairman, in the last 30 days, the fiscal news for the American taxpayer has not been good. Freddie Mac has announced that 

their taxpayer bailout now totals $51 billion. Fannie Mae’s Federal 

bailout has reached $34 billion. We just received news that the 

Pension Benefit Guarantee Corporation has announced that their 

deficit has climbed to $33.5 billion, the largest in the Agency’s 35- 

year history. 

8 

Many of us know that recently the trustees of the Social Security 

Board just announced that Social Security will begin to go bankrupt one year earlier than originally projected in last year’s report. 

And we all know, just weeks ago, Congress passed a budget which 

will triple the national debt in just 10 years, racking up more debt 

than has been racked up in the previous 220 years. It begs the 

question: Is there any cause or purpose for which we will not place 

more debt on future generations? 

Today, we are considering legislation to backstop, and perhaps 

bail out, States and municipalities who experience investment 

losses, and bail them out with the hard-earned money of American 

taxpayers who have also experienced investment losses. I fear that 

aspects of this legislation can cause people to engage in riskier behavior, believing that the government will perform their due diligence for them on the front end and then bail them out on the tail 

end. This can be dangerous for the investor and disastrous for the 

Nation and the Federal taxpayer. 

I yield back the balance of my time. 

The CHAIRMAN. The gentleman from Illinois, Mr. Foster, is recognized for 1 minute. 

Mr. FOSTER. I would like to thank Chairman Frank for holding 

this important hearing. For some time I have been concerned about 

the municipal bonds market and, in particular for example, the irrational situation with tax-exempt municipalities trading upside 

down with respect to Treasuries and so on, and also the collapse 

of the municipal bond insurance bond, which as the chairman 

noted, was questionable in any case. 

My home State of Illinois has not been immune to the turmoil 

in the municipal bond market. Moody’s recently downgraded my 

State to the A level from the double A. Moody said that Illinois was 

having difficulty managing its cash, perhaps with some justification. And in recent weeks, Illinois has been trying to push scheduled pension contributions into the future. Thus, the issue of meaningful less than triple A ratings has become financially significant 

to Illinois. That is why this hearing on this important set of bills 

designed to address this problem is very timely. 

In particular, I would like to focus for a moment on the Municipal Bond Liquidity Enhancement Act, which I am proud to sponsor. This bill would give the Federal Reserve authority to support 

certain variable rate municipal bonds which have been particularly 

hard hit during this crisis. 

I look forward to testimony on this, and I hope that we can pass 

this and the other related bills expeditiously. I yield back. 

The CHAIRMAN. The gentleman from California, Mr. Campbell. 

Mr. CAMPBELL. Thank you, Mr. Chairman. Municipalities in 

States have traditionally been more fiscally responsible than the 

Federal Government, in part because often their constitutions and 

charters require balanced budgets but also in part because they do 

not have the ability to print money or borrow without end, as does 

the Federal Government. 

I think it would be extremely unwise to allow municipalities and 

States to print money and borrow without end through proxy of the 

Federal Government because of guarantees. I think that would enVerDate Nov 24 2008 13:08 Oct 19, 2009 Jkt 051596 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\51596.TXT TERRIE
9 

danger the fiscal stability and the future of many States and counties. 

My home State of California needs to sell a lot of debt very soon 

but the municipal bond markets are actually functioning quite well 

out there, now albeit at high-risk premiums, reflecting the risk 

that exists in the overall market for municipal bonds and all types 

of bonds. The State of California can sell these bonds if they price 

them to the market. They should do so directly and without government interference or assistance in this or any other State. 

I yield back. 

The CHAIRMAN. We will now begin the statements from the witnesses. I have some charts that I have prepared that I am going 

to ask be shown. If anybody else has any, we would extend that 

same courtesy. They are fairly simple so they should not distract 

from the witnesses’ statements too much. I will ask that those— 

there are four charts that I am going to ask to be shown. 

And we will now begin with Martha Mahan Haines, who is the 

Chief of the Office of Municipal Securities of the U.S. Securities 

and Exchange Commission. 

Ms. Haines? 

STATEMENT OF MARTHA MAHAN HAINES, ASSISTANT DIRECTOR AND CHIEF, OFFICE OF MUNICIPAL SECURITIES, U.S. 

SECURITIES AND EXCHANGE COMMISSION (SEC) 

Ms. HAINES. Chairman Frank, Ranking Member Bachus, and 

members of the committee, my name is Martha Haines, and I head 

the Office of Municipal Securities in the Commission’s Division of 

Trading and Markets. I appreciate the opportunity to testify before 

the committee today on behalf of the SEC. 

The question of whether municipal financial advisors should be 

regulated is a topic of significant interest to the Commission. As 

described in my written testimony, we have been concerned about 

the conduct of some municipal financial advisors. However, the 

Commission’s current statutory authority limits our ability to address these concerns adequately. As a result, the Commission believes an expansion of its authority over the conduct of municipal 

financial advisors would be appropriate. 

The Municipal Advisors Regulation Act, proposed by Chairman 

Frank, would provide tools that would help address the problems 

we have observed concerning municipal financial advisors. In particular, we support the Act’s clarification of the specific duty of care 

that a financial advisor owes to its client. 

Dealers in municipal securities who are acting as financial advisors are subject to regulations adopted by the Commission and by 

the Municipal Securities Rulemaking Board. In contrast, the many 

financial advisors who are not broker-dealers currently are not regulated either as dealers or as investment advisors. 

The Commission has brought more than 20 enforcement actions 

under the anti-fraud provisions of the securities laws against financial advisors, but enforcement actions are an after-the-fact remedy. 

They cannot provide the kind of specific and nuanced guidance or 

cover the broad scope of activities that regulatory authority under 

the proposed legislation would make possible. Furthermore, harmful activities of market participants who are not subject to CommisVerDate Nov 24 2008 13:08 Oct 19, 2009 Jkt 051596 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\51596.TXT TERRIE
10 

sion registration or oversight are more difficult to discover. Without 

the opportunity that reporting, inspection, and examination provide, it is difficult to monitor these activities and keep apprised of 

emerging practices. 

Authorizing the Commission to require municipal financial advisors to have minimum qualifications, to follow conduct rules designed to ensure that they deal fairly with their clients, to eliminate pay to play activities, and avoid or disclose conflicts of interest 

would help prevent harm to issuers, taxpayers, and citizens who 

are dependent on the infrastructure financed with municipal securities—in addition to protecting the interest of investors. Notwithstanding these benefits, new regulations would, of course, impose 

some burdens on financial advisors, which could potentially be 

passed along to issuers through higher fees. 

To the extent that credit ratings provide meaningful information 

that assists investors, counterparties, and others in deciding how 

to allocate capital or whether to enter into a transaction, they can 

play an important part in a well-functioning financial market. Congress previously addressed the role of credit rating agencies by enacting the Credit Rating Agency Reform Act of 2006. Moody’s, S&P, 

and Fitch account for nearly all of the ratings of municipal securities. All three have noted that historical defaults on municipal securities have been lower than comparably rated corporate or sovereign securities. 

Some municipal issuers argue that the use of the same rating 

symbols but different definitions for municipal and corporate securities result in municipal bonds being rated lower than corporate 

bonds with an equivalent risk of default. Some investors, however, 

argue that the use of common symbols but different definitions is 

a useful way to compare the relative of municipal issuers. They 

contend that using a common set of rating category definitions 

would cause most rated municipal bonds to be slotted into the top 

two rating categories, making it more difficult to assess the individual merits of a bond, particularly for individual investors. 

The Municipal Bond Fairness Act, if adopted by Congress, would 

mandate that the SEC require rating agencies to establish and 

maintain credit ratings designed to assess the risk that investors 

may not receive payment, to clearly define rating symbols and to 

apply rating symbols in a consistent manner. The bill would permit 

NRSROs to determine complementary ratings provided that they 

use different rating symbols. 

Finally, the bill would require the SEC to establish performance 

measures for use when considering whether to initiative a review 

of an NRSROs’ adherence to its stated procedures and methodologies. 

The SEC staff stands ready to provide technical assistance on the 

bill if that would be useful to this committee. Thank you again for 

providing me with an opportunity to testify about these two bills 

now pending before Congress. I look forward to engaging with you 

on this matter in the future. 

[The prepared statement of Ms. Haines can be found on page 103 

of the appendix.] 

11 

The CHAIRMAN. Next, a returning witness, after some absence, 

the Senior Advisor to the Secretary, Department of Housing and 

Urban Development, Mr. Bill Apgar. 

STATEMENT OF WILLIAM APGAR, SENIOR ADVISOR TO THE 

SECRETARY, U.S. DEPARTMENT OF HOUSING AND URBAN 

DEVELOPMENT 

Mr. APGAR. Chairman Frank, Ranking Member Bachus, and 

members of the committee, thank you for the opportunity to testify. 

HUD is pleased to see that the Financial Services Committee is examining the range of issues and considering legislation relating to 

the lack of liquidity and other constraints in the municipal bond 

markets. While the Administration is not yet ready to take a position on the proposed legislation, taking steps to improve the functioning of the municipal bond market is clearly an important component of the overall response to the current housing crisis. My testimony will focus on one aspect of that, namely, how the disruption 

in the municipal bond market has significant implications for the 

functioning of State and local housing finance agencies. 

First, let me speak to the importance of State and local Housing 

Finance Agencies or HFAs. In strong and weak economies, HFAs 

have been reliable sources of finance for lower-income first-time 

home buyers and have played a key role in the delivery of Low-Income Housing Tax Credits, the Home Investment Partnership Program, and the Section 8 program. Through these programs, HFAs 

have helped 2.6 million families become first-time homeowners and 

have supported development of 150,000 new affordable rental housing units annually. 

FHA has enjoyed a very strong partnership with the various 

HFAs. HFAs have worked collaboratively with FHA to offer lowand moderate-income families access to special affordable housing 

programs that rely on FHA insurance. More recently, HFAs have 

been engaged in dialogue with the FHA on issues relating to the 

current market crisis and the types of programs that can help families keep their homes, including new changes to the HOPE for 

Homeowners Program that President Obama signed into law just 

yesterday. 

As you know, on February 18th, the President announced his 

Housing Affordability and Stability Plan, a plan that included initiatives to support HFAs in their effort to stimulate first-time home 

buying and provide affordable rental housing. The White House, 

the Treasury, and HUD are now finalizing the details of a proposal 

designed to address three distinct but interrelated challenges facing HFAs. First, the lack of financing for new HFA bond issuance, 

the lack of liquidity and support of HFA variable rate debt obligations, and ongoing credit and balance sheet stress for HFAs at risk 

of rating downgrades. 

In light of the strong track record and considerable capacity, last 

year in the Housing and Economic Recovery Act, Congress provided 

HFAs with $11 billion worth of new housing bond authority to finance affordable single-family and multi-family mortgages. Unfortunately, they have not been able to take advantage of this expanded housing authority. Traditionally, HFAs have obtained funding through the issuance of tax-exempt housing bonds or mortgage 

12 

revenue bonds. Currently, HFAs have been virtually frozen out of 

this market, unable to find investors willing to buy their bonds at 

rates that allow HFAs to lend the proceeds affordably. As a result, 

an important source of quality lending for low- and moderate-income borrowers has been severely curtailed. 

In addition to MRBs, some HFAs issue variable rate debt obligations in order to offer mortgages at lower interest rates. The current market for VRDOs has all but evaporated, as buyers of these 

investments have left the market and have been significantly 

downgraded or are imposing unreasonable terms and excessive 

rates. State HFAs have over $23 billion in VRDOs outstanding. 

Nearly 3 billion of the existing liquidity facilities have already 

expired or will expire at the end of 2009. Those unable to roll over 

their VRDOs have been forced to pursue more expensive mechanisms. For example, a growing number of HFAs have been unable 

to find buyers and often are forced to convert this debt to bank 

bonds, often requiring them to pay this debt off at higher rates or 

under accelerated or what some call hyper-amortization schedules, 

further depleting their resources and weakening their financial positions. 

Additional threats to the health of HFAs are rating agency downgrades of private mortgage insurance providers, bond insurers, and 

liquidity providers, as well as deterring performance of HFA mortgage portfolios. 

The side-lining of HFAs could not have come at a worse time for 

housing and economic recovery. HFAs project that they could issue 

$33 billion in tax-exempt funds over the next 2 years, providing 

HFAs the financing to continue as a key source of affordable, flexible mortgages. In a period of declining home prices and decreasing 

affordability, HFAs are no longer in a position to help first-time 

buyers take advantage of these good opportunities. FHA’s inability 

to respond to a growing demand for first-time buyers in turn affects the broader housing market. 

In conclusion, the disruption in the municipal bond market has 

severely hindered the ability of State and local housing finance 

agencies to achieve their mission. HUD looks forward to working 

with the committee on solutions to address the disruptions in the 

broader municipal bond market and especially their impact on 

State and local housing finance agencies. 

[The prepared statement of Mr. Apgar can be found on page 75 

of the appendix.] 

The CHAIRMAN. Thank you. 

Next, we have David Wilcox, who is Deputy Director of the Division of Research and Statistics of the Federal Reserve System. 

STATEMENT OF DAVID W. WILCOX, DEPUTY DIRECTOR, DIVISION OF RESEARCH AND STATISTICS, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. WILCOX. Chairman Frank, Ranking Member Bachus, and 

members of the committee, thank you for the opportunity to comment on issues related to the markets for municipal debt. Today, 

I will provide some background on the structure of the municipal 

debt market, discuss current stresses in this market, and comment 

on some policy considerations. 

13 

The market for municipal debt is large and diverse. At the end 

of 2008, investors held about $2.7 trillion of municipal securities 

issued by more than 50,000 entities. Approximately half of municipal debt has credit enhancement from financial guarantors. These 

firms are often also called bond insurers or monolines. Banks also 

provide credit enhancement to municipalities as part of letters of 

credit. 

Most municipal bonds have long maturities. Some municipalities 

have issued securities such as Variable Rate Demand Obligations, 

or VRDOs, and Auction Rate Securities, ARS, that combine long 

maturities with floating short-term interest rates. VRDOs have explicit liquidity support, typically from banks, which helps ensure 

that bond-holders are able to redeem their investment at par plus 

accrued interest even if the securities cannot be successfully remarketed to other investors. VRDOs often have credit enhancement from financial guarantors or banks. 

The market for municipal debt has been strained by the weakened fiscal condition of municipalities, the diminished financial 

strength of the financial guarantors, and the higher costs of liquidity backstops and credit enhancement from banks. Despite these 

strains, the market for traditional fixed rate municipal debt appears to be functioning fairly well for many issuers. The lower 

rated municipalities are facing unusually higher costs of issuing 

debt relative to higher rated issuers. 

The markets for floating rate municipal debt are in more serious 

condition. Market participants report that the cost of liquidity support and credit enhancement for VRDOs has risen sharply and the 

market for new auction rate securities is dead. Some municipalities 

have been able to issue new VRDOs but many lower-rated issuers 

appear to be either unwilling or unable to issue this type of debt. 

In addition, some VRDOs have reportedly been put to their liquidity providers, turning them into bank bonds, which typically carry 

penalty interest rates and can eventually be subject to accelerated 

amortization. This combination of higher rates and faster amortization can cause a sudden and substantial increase in the debt service payments required of the issuing municipality. 

Some policy actions have already helped address these strains. 

For example, Congress has enacted two large stimulus packages. In 

addition, the Federal Open Market Committee lowered the Federal 

funds rate to its current target range of zero to one-quarter percent, a historically aggressive adjustment. And the Federal Reserve 

has created a range of facilities aimed at improving the functioning 

of financial markets. 

The recently-concluded Supervisory Capital Assessment Program 

should also provide some indirect help to municipalities because 

many of the institutions subject to that program also provide liquidity backstops for VRDOs. 

As Chairman Bernanke has noted before, the Federal Reserve 

has important misgivings about assuming a direct role in the municipal bond market in light of the political dimensions of the issue. 

Indeed, this is one reason why the Federal Reserve Act imposes 

limits on the ability of the Federal Reserve to purchase municipal 

debt, including a 6-month maturity limit. Accordingly, the Federal 

14 

Reserve believes that a direct role is better suited to the fiscal authorities than to the Central Bank. 

In addition, it is important to note three key characteristics of 

the Federal Reserve’s responses to the financial crisis thus far: 

First, before lending can be extended under Section 13.3 of the 

Federal Reserve Act, the Board of Governors must find that unusual and exigent circumstances prevail. 

Second, the Federal Reserve has been mindful of the need to protect both it and Federal taxpayers from credit losses. 

Third, Federal Reserve programs have been designed carefully to 

allow clear exit strategies to help ensure the ability of the Central 

Bank to raise the Federal funds rate from its current level, when 

necessary, to promote the mandate given to us by the Congress to 

foster maximum sustainable employment and price stability. 

These considerations are consistent with the Joint Statement on 

the Role of the Federal Reserve issued on March 23rd by the Treasury and the Federal Reserve and are critical to achieving the dual 

monetary policy mandate and preserving the Central Bank’s independence. 

As the Congress considers whether future action is warranted, it 

may wish to consider the degree to which government involvement 

in this market is appropriate in the long term and how to facilitate 

the government’s exit from the market. 

Thank you for the opportunity to testify today. We look forward 

to working with Congress to assist you in your deliberations on 

these matters. In addition, the Federal Reserve will continue to 

work aggressively to restore normal functioning to the financial 

markets and the flow of credit in the economy. 

I look forward to addressing your questions. 

[The prepared statement of Mr. Wilcox can be found on page 184 

of the appendix.] 

The CHAIRMAN. And now, the aforementioned Mayor of the City 

of Dallas, Mayor Leppert. 

STATEMENT OF THE HONORABLE THOMAS C. LEPPERT, 

MAYOR OF DALLAS, TEXAS, ON BEHALF OF THE U.S. CONFERENCE OF MAYORS 

Mr. LEPPERT. Thank you very much, Mr. Chairman. First, let me 

thank you, Ranking Member Bachus, and all the members of this 

committee for holding this hearing to focus national attention on 

a critical challenge facing the Nation’s cities. I am Tom Leppert, 

mayor of the City of Dallas and chairman of the U.S. Conference 

of Mayors Metro Economies Committee, which addresses issues impacting the viability of local economies. Today, I am pleased to appear on behalf of the Nation’s mayors to offer comments on pending 

legislation to assist State and local governments gain better access 

to the credit market. 

Before I get started, I want to thank you, Mr. Chairman, for responding to the problems municipalities are experiencing in assessing the credit market. We appreciate your coming to speak to the 

mayors earlier this year and thank you for introducing legislation 

that would address some of the concerns we raised then about the 

capacity of local governments to secure needed financing. 

15 

For more than a year, State and local governments have suffered 

from the global credit crisis. According to BNY Mellon Asset Management, 2009 municipal bond issues are expected to decrease by 

an amount comparable to eliminating all Federal highway and 

transit spending for an entire year. And it is our citizens and taxpayers who will suffer the consequences. 

Many capital improvement projects across the Nation, not filling 

operating shortfalls, both large and small, have been halted due to 

the lack of affordable access to the market and the inability of 

States and local governments to issue bonds. At a time we need to 

create jobs and economic activity, local governments have increasingly been unable to access the capital markets due to prohibitive 

borrowing costs. This lack of liquidity is holding back key projects 

that could collectively have an enormous impact on our national 

economy. 

As an example, in Dallas we have several major projects we 

would move forward on if the municipal markets return to a ‘‘normal’’ state. Proceeding with these projects today would put people 

back to work and take advantage of reduced construction cost to 

the benefit of all of our taxpayers. 

Cities and States across the country are in the very same position. According to Thomas Doe, CEO of MMA Advisors, with fixed 

rate yields having risen to extraordinary heights, many State and 

local issuers have tabled the majority of their planned primary 

market loans. MMA estimates that in 2008, more than $100 billion 

of planned new money infrastructure projects were delayed, the 

majority of that occurred in the fourth quarter. I would ask you to 

simply think of that quarterly number as a percentage of the infrastructure and public spending in the American Recovery and Reinvestment Act. Indeed, your action to support the municipal bond 

market would result in a major stimulus to the economy without 

a Federal outlay of funds. 

Given the economic challenges my colleagues face in cities and 

States across the Nation, and you face nationally, I would also suggest to you that it is imperative these actions move forward with 

an urgency. Implementation in years, or even many months, is not 

what your Nation needs. We need to accelerate this to the current 

fiscal year. 

That is why the four legislative proposals being discussed today 

are important in the short term to repairing our market and helping governments move their communities by building and repairing 

schools, firehouses, highways, and water systems. It is also worth 

mentioning that unlike the Federal Government, local governments 

do not have the luxury of carrying a deficit. By law, they are required to balance their budget every year. For many, the only way 

to provide vital infrastructure is through the issuance of bonds, 

which has been a viable way of financing critical infrastructure 

projects for more than 100 years. 

Now that I have provided a brief overview of the situation local 

governments are facing, I would like to discuss briefly each of the 

pending proposals. 

The Municipal Bond Fairness Act would give investors a more 

accurate portrayal of the low risk of municipal securities compared 

to their corporate counterparts. Government bonds, either pledged 

16 

with the full faith and credit of the government, or governmental 

revenue bonds, as shown on the right side chart, have a nearly zero 

default rate. Ensuring that rating agencies use uniform and accurate credit ratings for all securities will lower borrowing cost and 

spur increased investment in municipal bonds. The Conference of 

Mayors supports this legislation. 

We believe the Municipal Bond Insurance Enhancement Act 

would help increase the capacity of municipal bond insurers in the 

short term to ensure new risks and thereby make it easier for 

issuers to borrow in the capital markets. Again, the Conference of 

Mayors supports this legislation. 

As has been frequently cited, nearly half of all municipal credits 

were insured until 2007. Often, the insurer chose to obtain bond insurance in order to receive a triple A rating on the issuance, which 

lowered the interest rate cost for both the bonds and savings at 

greater than the cost of insurance. Many public entities simply cannot issue debt without credit enhancement as they or revenue bond 

project they are offering are rated below double A. As mentioned, 

in many cases in today’s market, there is neither a viable nor affordable bond insurer option. Short-term Federal support would be 

greatly beneficial to the municipal bond market, specifically for 

smaller insurers. And as a side, I would also ask you to consider 

this enhancement for the Build America bonds. It could have an 

enormous impact on the economy immediately. 

Issuers of short-term debt have been most affected by the credit 

market crisis. Governments purchase letters of credit or secure liquidity in order to achieve lower borrowing costs than would be 

possible if they offered securities through their own credit. However, they have faced a double whammy as the markets have frozen and most liquidity providers have either ceased to exist over 

the past 6 months or have stopped providing these services. 

Mr. Chairman, the legislation would greatly help this sector of 

the market. I would also point out there are billions of cash flow 

borrowing needs this legislation would assist. Issuers across the 

Nation have told us they are experiencing difficulty obtaining letters of credit that were due in recent months. Key examples are 

cited in my written testimony. 

While the U.S. Conference of Mayors does not have specific policies supporting the regulation of financial advisors to State and 

local governments and requiring them to register with the SEC, we 

understand and are supportive of the intent to protect insurers and 

place financial advisors on the same regulatory playing field as the 

broker-dealer community. 

In summary, Mr. Chairman, the municipal bond market is experiencing severe liquidity shortfall. Many local governments around 

the Nation have placed many infrastructure projects on hold until 

market conditions improve. As a result, thousands of short-term 

and permanent jobs have been placed on hold as well. This situation can change as soon as financing of these projects at reasonable 

rates can be secured, allowing cities to be full partners in efforts 

to renew our Nation’s infrastructure, revitalize our economy and 

create jobs. 

The U.S. Conference of Mayors expresses its support for your 

continued efforts to assist State and local governments’ municipal 

17 

bond market. The Nation’s mayors stand ready to assist you in any 

way that we can. 

Thank you very much. 

[The prepared statement of Mayor Leppert can be found on page 

123 of the appendix.] 

The CHAIRMAN. And finally, Ben Watkins, who is the director of 

the State of Florida Division of Bond Finance. 

Mr. Watkins? 

STATEMENT OF J. BEN WATKINS, DIRECTOR OF THE DIVISION 

OF BOND FINANCE, STATE OF FLORIDA 

Mr. WATKINS. Mr. Chairman, Ranking Member Bachus, my role 

as the director of the Division of Bond Finance is to be responsible 

for all of the State’s financing programs from general obligation 

bonds to revenue bonds for small projects. We execute anywhere 

from 15 to 20 transactions per year, an annual issuance volume of 

approximately $2.5 billion. We borrow for schools, roads, buying 

conservation land, State office buildings, universities, dormitories, 

parking garages, etc. 

The most meaningful insight I think I can provide to the committee is to share with you our personal experiences over the 

course of the last 6 months. The last quarter of 2008, the markets 

were frozen, and we effectively had no access to credit for any of 

our debt or any projects to be financed. Since that time, 2009 has 

been a mixed bag, depending on the type of transaction we were 

executing. We have sold five bond issues totaling approximately $1 billion. 

The transactions that were State general obligation bonds, since we 

are a large high-grade issuer, were very well received in the market and the market for that type of paper is robust. However, on 

our lower rated credits, A category and lower, we are experiencing 

difficulty with market access issues and increased borrowing costs. 

The market access is still an issue for smaller, infrequent issuers 

or lower rated issuers. State and local governments need access to 

credit, just like businesses do, to continue to operate and to continue to build America’s infrastructure. The impact on issuers has 

been to delay or cancel projects that are needed and increasing cost 

to borrowing, which increases the cost to taxpayers and users of 

the facility. 

The Municipal Bond Enhancement Act can help by allowing and 

providing market access to lower rated issuers and the market 

needs a new source of bond insurance to operate efficiently and effectively. The private markets are simply not providing the capacity for bond insurance that it once did and the demand and the 

need for bond insurance for smaller, infrequent issuers that make 

up the bulk of the municipal market is sorely needed. The means 

or the mechanism can be debated but the need is there. 

The most acute problem confronting small and infrequent 

issuers, which make up the bulk of the municipal market, is the 

problems associated with the short-term markets. As my colleague 

Mr. Wilcox from the Federal Reserve has pointed out, there is simply diminished liquidity available in the market to support that 

market. Each of the products, whether they are variable rate demand bonds, auction rate securities or commercial paper, need liVerDate Nov 24 2008 13:08 Oct 19, 2009 Jkt 051596 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\51596.TXT TERRIE
18 

quidity to function. Liquidity is provided by banks in the form of 

lines of credit, letters of credit, and standby bond purchase agreements. That capacity is simply not available currently. This again 

increases the cost of the borrowing and creates impediments to 

issuers financing projects and moving capital projects forward. 

The stimulus provided has created a bridge for governmental 

budgeting issues but there has been nothing done to assist with access to the credit markets and the problems in the credit markets 

persist. The Municipal Market Liquidity Enhancement Act can 

play a critical role in addressing the problems in the short-term 

market and sustaining the very important financing tool available 

to State and local governments. This can be done either directly 

through the Federal Reserve or indirectly through the banks that 

the Federal Government has supported with its investments. 

The Municipal Bond Fairness Act and Uniform Ratings are also 

essential to the proper functioning of the markets. As the taxable 

and tax-exempt markets become more intertwined, it is imperative 

that we have a comparable basis for comparing municipal securities with our corporate counterparts. This will serve to expand the 

buyer base and put pressure, downward pressure on rates and provide issuers greater access to a larger pool of taxable buyers. So we 

are supportive of that initiative as well. 

The problems in the municipal market are real. The problems 

with market access are real and tangible. The increase in the borrowing costs confronted by local governments at a time when it can 

be ill-afforded are also causing problems. This delays infrastructure 

and the much needed capital spending across the nation. 

I want to thank you, Mr. Chairman, for raising these issues and, 

more importantly, proposing solutions to some of the problems confronted by State and local governments. 

[The prepared statement of Mr. Watkins can be found on page 

174 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Watkins. With the generous 

agreement of the ranking member, I am going to recognize one of 

our colleagues. We have two members on this committee who were 

themselves mayors: our colleague, Mr. Cleaver, who was the mayor 

of Kansas City; and our colleague, Mr. Capuano, who was the 

mayor of Somerville, Massachusetts. We also have the chief executive of one of the largest county governments in the country, our 

neighbor from Fairfax County, I recognize with unanimous consent 

the gentleman from Virginia, Mr. Connolly, for 2 minutes. 

Mr. CONNOLLY. I thank the chairman and the ranking member 

for their generosity. I would hope that this committee would act to 

intervene to help municipalities in a time of need. I heard the remarks of Mr. Garrett, and I must take enormous exception. The Social Darwinism espoused there would basically throw municipalities and States in the United States into the ditch. It is not because of bloated budgets that municipalities find themselves in the 

quandary in which they find themselves today. It is because of the 

housing bubble, it is because of statutes and constitutions that require balanced budgets, it is because ‘‘safe money’’ after September 

15th fled to U.S. Treasuries, even though as these charts prove, the 

default rate among municipals is minuscule, and combined with 

the double whammy of the loss of private insurance to basically 

19 

provide credit enhancement. And that situation, while slightly improved, still leaves 55,000 municipal bond issuers in a very difficult 

situation. 

If we do not want to see this economy contract further, we need 

to help municipalities and States access credit. They create jobs. 

They help provide an impetus to the economy and without which 

they will in fact unfortunately require further contraction of the 

economy, precisely the opposite of the public policy goal we seek. 

So I would hope, and I have introduced legislation of course 

along with the legislation in front of this committee, H.R. 1669, it 

can make the Federal Government the insurer of last resort to 

make that credit enhancement possible. It can allow for Federal 

loan guarantees if that is what is required. It could even create 

new financial instruments that would market municipal bonds that 

would be serviced and be the responsibility of municipalities but in 

the market that would look like U.S. Treasuries. 

Mr. Chairman, I know you recognized this in a colloquy you and 

I had back in January where in fact you referred to municipalities 

as among the most sympathetic victims of the current economic crisis. I agreed with you then. I agree with you now. It is a privilege 

to be with you this morning, and I would hope this committee 

would act. 

The CHAIRMAN. The gentleman from Alabama has a unanimous 

consent request. 

Mr. BACHUS. Thank you, Mr. Chairman. I ask unanimous consent to enter the following into the record: A written statement 

submitted by Mr. Tim McNamar, former Deputy Secretary of 

Treasury during the Reagan Administration; and a May 9, 2009, 

Wall Street Journal Op Ed entitled, ‘‘Muni Bonds Need Better 

Oversight,’’ by former SEC Chairman Arthur Levitt. 

Chairman FRANK. Without objection, it is so ordered. 

The CHAIRMAN. I want to just begin my questioning by putting 

some charts up, and I just want to review these briefly. 

[charts] 

The CHAIRMAN. First, we have a wide variety of things that are 

called municipal bonds. Full faith and credit general obligation 

bonds are issued with the full taxing power of the issuing entity 

behind them. They are in fact as good as Treasuries. There has 

been, according to Moody’s, one default since 1970 and that was a 

default in which the bond holders were in fact paid 15 days late. 

The total loss was one 15-day delay. General obligation bonds are 

very solid and the reason is, having served in the State legislature, 

and others who have served in State legislatures would know this, 

no State could afford to allow any of its entities to default because 

that would mean such terrible costs going forward. So everybody 

else is at risk, the teachers and the firefighters and everybody else, 

because you have to pay those bond holders to protect your capacity. 

Secondly, default rates. Now, on triple A bonds, there have been 

zero municipal defaults, on corporate bonds, .52 percent. That is 

pretty significant but even more significant are the BAA because 

I believe that a number of municipal bonds, particularly full faith 

and credit, are unfairly rated to be double A when they ought to 

be triple A because they never default. And here corporate bonds 

20 

at that rating default by 37 times as much as municipal bonds, .13 

versus 4.64. The problem is that these are not reflected in the ratings. 

If in fact a bond rated BAA were rated triple A, you would save $627,000 per $1 million. When you are talking about hundreds of 

billions of dollars of bonds issued, you are talking about a very significant cost to taxpayers. Either they pay too much or they go 

without bridge repairs and fire stations and new schools. 

And, finally, here is the list of municipal bond defaults, as I said, 

general obligation, one. But look at the rest: water and sewer, 

none; public universities, none; private universities, one; electric 

power, two; and not-for-profit health care, 10. Of 8,591 bonds rated 

by Moody’s in that 30-year period, 1970 to 2000, there were 5 defaults. That is simply not reflected in the market. Now people say, 

‘‘Well, the market knows everything.’’ Some people used to say 

that; I do not think they still do. Market failure is a part of capitalism. That does not mean the market does not work; it means 

it does not work perfectly. 

But I was particularly pleased to see from Mr. Wilcox a mention 

of some of the problems the bonds now face, the municipal bond 

market. He said there were strains, and there were three strains: 

One, the weakened fiscal position of the issuing jurisdictions. I acknowledge that although the record is clear. If it is a full faith and 

credit general obligation bond, that weakness has not been a problem. Even recently with this terrible problem, we have not seen defaults. 

But two of the problems are not the fault of municipalities and 

cannot be corrected by them. One is the pressures on the providers 

of liquidity support. Well, those are the banks, that hits everybody. 

But here is one unique to the municipalities, the weakened condition of the financial guarantors. We have forced municipalities to 

get into the business of buying insurance from people who were 

then in trouble themselves, and this is the case where we had 

somebody who was struggling to swim, and we sent them a lead 

life preserver and insisted that they wear it, and they have sunk 

a little. And what we want to do is to cut them loose from that. 

And these are indisputable facts. 

Let me just ask, Mr. Watkins, I was very impressed because you 

have had this role. You are from the State of Florida, you are appointed by whom? 

Mr. WATKINS. Originally appointed by the late Governor Lawton 

Chiles and served under two Administrations of Governor Bush 

and have been re-appointed by Governor Crist. 

The CHAIRMAN. So you have served in a bipartisan way. Does 

Governor Crist know you are here? 

Mr. WATKINS. Yes, sir, his staff does. 

The CHAIRMAN. Okay, and I assume that what you say he would 

be supportive of? 

Mr. WATKINS. I do not speak for the governor, sir. I am here representing the Government Finance Officer’s Association, but I am 

happy to address any particular issue. 

The CHAIRMAN. Okay, I appreciate that. I assume if you go back 

and no one yells at you, we will take it that there is some general 

agreement on the part of the governor. 

21 

[laughter] 

The CHAIRMAN. I just want to close by saying people talk about 

too much staff for the Federal Government. If I had to choose 

frankly between the war in Iraq, at a cost of hundreds of billions 

of dollars, and reducing the interest rate cost of trying to build 

schools, I would go for the latter. And I want to make this point, 

it is a wholly theoretical risk for the Federal Government if we put 

the Federal Government’s reinsurance—and by the way, one of the 

things—I am going to close, I will give myself 10 seconds—that the 

League of Cities is talking about is creating a Cooperative Municipal Insurer. That would be an ideal situation it seems to me because you would have this municipal insurer and then you could 

have the reinsurance, saving municipalities billions of dollars a 

year, municipalities and other issuers, for important public purposes at virtually no risk to the Federal Government seems to me 

a pretty good day’s work. 

The gentleman from Alabama? 

Mr. BACHUS. Thank you. Mr. Wilcox, is the Federal Reserve concerned about taking any direct role in supporting the municipal 

debt market? 

Mr. WILCOX. Yes, sir, we are concerned about taking a direct 

role. 

Mr. BACHUS. What are your concerns? And pull the microphone 

a little closer. 

Mr. WILCOX. Our concerns are several-fold. First of all, we are 

quite concerned about preserving our political independence and 

becoming interposed in the credit risk judgment that would be required under some interpretations of the draft language, discriminating between jurisdictions that would receive credit and would 

not receive credit. We think that the traditional function of the 

Central Bank has been to steer clear of credit allocation, and we 

would greatly prefer that functions that are intrinsically fiscal in 

nature be left to fiscal authorities. 

Secondly, as Chairman Bernanke has expressed on a number of 

different occasions, we have a great need to preserve an exit strategy so that we can control the size of our balance sheet. At some 

point, the Federal Open Market Committee will make a determination that the Federal funds rate should be lifted from its current 

very low level. We need to be sure that we can control the level 

of bank reserves at that time. And in order to do that, we have to 

be able to either run off the assets that are on our balance sheet 

or have some other set of tools for controlling our bank reserves. 

And, lastly, our balance sheet has to be protected from the risk 

of losses. And here, a particularly difficult issue in this context is 

the maturity mismatch between longer dated securities and the 

term of our lending. So if we were to take these securities onto our 

balance sheet now, and then be confronted in some future circumstance with a need to run them off, credit losses themselves 

would not necessarily be the only determinant of whether we as 

the Federal Reserve would sustain a loss at the point when the 

Open Market Committee determined that it needed to tighten the 

stance of monetary policy; it is possible that we would need to sell 

those securities, and we would have to take whatever price was 

22 

available in the market at that time. So the maturity mismatch is 

a very important consideration in our analysis of this situation. 

Mr. BACHUS. Thank you. Chief Haines or Ms. Haines. Should I 

call you Chief Haines? Would you prefer Mrs.? Thank you. In 1997, 

I helped Commissioner Betty Fine Collins write a letter to the SEC 

where we set out what we thought was a pay for play scheme. That 

letter and the materials that we forwarded, to the best of our 

knowledge, was never acted on. Now, on January 5th of 2007, I 

met with the SEC staff and followed that up on January 23rd with 

a letter asking you to investigate some of the investment banks 

that had dealt with Jefferson County, and there was an indication 

this month that you are going forward with an action against them. 

Can you give me any idea of maybe why nothing was done in 1997? 

Are you familiar with that file, or could you go back and locate it 

and see what happened? And also 2007, maybe why it took another 

21⁄2 years to do anything? 

Ms. HAINES. I cannot speak to what happened in 1997, as I only 

joined the Commission in 1999. I would be happy to go back and 

try to get more information and get back with you about that. 

I cannot, of course, comment on pending enforcement actions. I 

would only say that there is always a great deal going on at the 

Commission, which is beneath the surface and cannot be seen by 

the public—partly to protect those whom we are investigating who 

may turn out to have done nothing wrong. 

Mr. BACHUS. All right, I would be interested in knowing maybe 

what, if anything, was done in 1997. 

Ms. HAINES. I will be happy to go back and get you that information. 

Mr. BACHUS. In fact, it was the same materials basically and 

some others. Let me ask one just final quick question: How quickly 

could the SEC establish an effective registration and examination 

program for municipal financial advisors, as the chairman suggested, and I have said that I would be supportive of in some form? 

Ms. HAINES. I have not consulted internally about that. I am 

sure we could do it very promptly. There are really not all that 

many non-broker-dealer financial advisors. There are approximately 260 and so it should not be a huge undertaking. 

Mr. BACHUS. Once you got statutory authority? 

Ms. HAINES. Right, of course, we need statutory authority to do 

anything in that area. 

Mr. BACHUS. Thank you. 

The CHAIRMAN. The gentleman from North Carolina? 

Mr. WATT. Thank you, Mr. Chairman. I am going to reluctantly 

put on my conservative Republican hat here for a second and explore with you the interplay between the Municipal Bond Insurance Enhancement Act and the Municipal Bond Fairness Act. The 

latter I am very much supportive of because I think we need to 

separate the municipal bond market from the corporate bond market and have them rated separately. But there is one thing that is 

a little troubling to me in your testimony, Mr. Wilcox in particular, 

it is your testimony about municipalities also issuing securities 

that combine long-term maturities with floating short-term interest 

rates that are reset on a weekly, monthly or other periodic basis. 

That sounds strikingly to me like what we just got through reguVerDate Nov 24 2008 13:08 Oct 19, 2009 Jkt 051596 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\51596.TXT TERRIE
23 

lating in the private lending market, adjustable rate mortgages. 

And one of the concerns I have is if we provide a Federal Government backstop for that kind of mortgage as opposed to the 30 year 

long-term mortgage, that we would be encouraging municipalities 

into kind of gambling with short-term versus long-term interest 

rates, which is what we just discouraged individuals from doing. So 

am I missing something here? 

First of all, the insurance and the guarantee part of what has 

been going on in the market I take it has been responsible for reducing municipal interest rates, I take it, is that correct, Mr. 

Apgar? 

Mr. APGAR. That is my understanding, yes. 

Mr. WATT. Okay, and so we would be substituting the Federal 

Government under this Municipal Bond Insurance Enhancement 

Act as kind of an insurer instead of the private market? 

Mr. APGAR. Correct. 

Mr. WATT. Now, should I be concerned about differentiating between a long-term 30-year bond, which has a fixed rate on it, for 

a long period of time, and these shorter term variable rate securities if I am worried about protecting the taxpayers? 

Mr. APGAR. Concerned, yes, but both have a role to play in finance. 

Mr. WATT. They have a role to play but should I be providing insurance on the same basis and reinsurance backstop on the same 

basis for those riskier kind of variable rate mortgages as I would 

provide on a 30-year fixed-rate mortgage? I guess that is the question I have. Is not that what we just differentiated between in the 

private market in our predatory lending bill? 

Mr. APGAR. I believe that you would want to differentiate the two 

because the risks are different. 

Mr. WATT. So we would then maybe put the same kind of constraints around this that we put in the Safe Harbor provision in 

the predatory lending bill, would that be a reasonable approach to 

it? 

Mr. APGAR. I am not sure how this relates to that matter. I am 

not sure what constraints you are talking about. 

Mr. WATT. Mr. Wilcox, maybe you can understand where I am 

getting to here. I think they are very much related, are they not? 

Mr. WILCOX. One of the distinctions between an adjustable rate 

mortgage and an auction rate security, for example, is that the rollover risk in an instrument like the adjustable rate security is more 

acute. To be sure, an adjustable rate mortgage presents certain financial risks to the homeowner, but the homeowner is not at risk 

of having the financing withdrawn. With an auction rate security, 

what we saw is that support for that disappeared and so the rollover risk in that market proved to be more acute. So they share 

some similarities in terms of their characteristics but there are important differences as well. 

Mr. MOORE OF KANSAS. [presiding] The gentleman’s time has expired. Mr. Posey of Florida? 

Mr. POSEY. Thank you, Mr. Chairman. I wonder if each panelist 

could give me in as short an explanation as possible why you think 

we ended up with you in the crisis? We can start with Ms. Haines? 

24 

Ms. HAINES. I am not clear on what your question is, could you 

repeat? 

Mr. POSEY. What do you think the nexus of the crisis was that 

brings your organization into the focus? 

Ms. HAINES. The downturn in the markets, of course, had a negative impact on many, many investors. We are concerned about 

those investors; we are an investor protection agency. That has always been our focus. And we are also concerned that investors get 

full information at the point that they are going to invest, from 

their broker and, if it is an initial offering, from the offering documents, so that they can make an informed investment decision. 

And in the recent economy, we have seen risks that certainly are 

unusual, and we believe they should be fully disclosed. 

Mr. POSEY. The thing that appears relevant is obviously the entire crisis was driven by greed from many different angles around 

the world, and it appeared everybody wanted to get more and more 

competitive with the returns that they got. It is a natural phenomenon to do, and so people got reckless. Banks got reckless. Investors got reckless. And because somebody else did it, it almost 

seemed okay. Like your mother always said, ‘‘Well, if everybody 

else is jumping off the roof, are you going to go jump off the roof 

too?’’ Well, we saw a lot of people jumping off the roof. I know with 

banks we have heard from some of the experts that this is a 1-in100-year phenomenon, just like a big storm, and usually so many 

of these misbehaviors are self-correcting. People are aware of the 

new scams, there is a new awareness to look out for this. It is 

going to be hard to sell anybody a derivative for any reason, I 

would suspect, for some time. And I am just wondering if a whole 

lot of new regulation might be a cure in search of new disease. 

Maybe if you could just comment on that? 

Ms. HAINES. I think that new regulations need to be done very 

carefully, to the extent we go forward with them, and Congress 

gives us additional authority. Unintended consequences are something that we at the Commission worry about whenever we look at 

a regulation and in particular with the financial advisors, many of 

them are small entities. 

Mr. POSEY. Okay, thank you. Mr. Watkins, your comments? 

Mr. WATKINS. We come to the table because I borrow money for 

the State for a living. 

Mr. POSEY. Right. 

Mr. WATKINS. To finance infrastructure, all of the things that I 

talked about before. We are the sympathetic victims in all of this 

crisis. We have done nothing wrong. The State has been managed 

very well financially over the years. So this causes me two problems: One is that my ability to borrow money to fund infrastructure is impaired; and two is the cost of funding. Our number one 

mission is to borrow at the lowest possible cost for infrastructure 

needs for the State. To the extent that that is impacted, that is obviously of concern to us. So that is how we come to this crisis, as 

an innocent victim in trying to discharge our responsibilities. 

Mr. POSEY. Would anyone else like to comment? 

Mr. LEPPERT. I would simply like to add to Mr. Watkins. Again, 

when we are looking at largely the enhancement, I want to stress 

again two points: Number one, what we are looking at is simply 

25 

a short term. We are not looking for something 5, 10, or 15 years 

out. We are only looking at short-term to buoy the markets up because the markets have clearly gone away, as Mr. Watkins has 

said, for no reason by the cities and the States. 

That leads to my second point. The second point is we are talking 

about capital projects going forward, we are not talking about subsidizing budgets that we handle, we are not talking about operating shortfalls, we are largely talking about financing infrastructure and major projects going forward. And I think that is what 

needs to be kept in mind in terms of the policy decisions that we 

are looking forward. It is one short term, and again it is not talking 

about operating budgets, it is talking about capital projects to move 

forward because we simply do not have a market or we do not have 

viable options that we used to have on the enhancement side, 

monolines, insurers, etc. 

Mr. POSEY. That is the same basic problems that all the small 

businesses have out there, the funds are just not available, and I 

do not think it is going to happen no matter what the government 

does unless and until they come up with a plan and say this is 

what you can expect us to do, here is how you can measure the 

progress back. I think people are going to sit on their money and 

not spend a dime until they have some degree of certainty that 

there is going to be a recovery. Everyone is expecting the worst 

now and so far we have just seen the Federal Government throw 

up some ‘‘Hail Mary’s’’ and hope that they catch them in the end 

zone and score some points and turn the economy around but it 

does not seem to be working very well. 

Mr. LEPPERT. I would say anecdotally, and I think we can come 

up with specific examples, on the municipal bond side, there is a 

different situation. There are projects that would be ready to move 

forward if there were enhancements. If you look at a lot of medium 

pieces of the market, rated A, those sorts of thing, if there was an 

enhancement available, which today is not, the six players that 

used to be simply are not around any more, if there was an enhancement, you would have those projects go forward and those are 

a whole array of projects literally across the country. 

Mr. POSEY. This is the same problem. 

The CHAIRMAN. I thank the gentleman. 

Mr. POSEY. I thank the chairman. 

The CHAIRMAN. The gentleman from Kansas? 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. Mr. Apgar, 

hospitals in the State of Kansas have felt the impact of the financial crisis, not just in their day-to-day operations but in the borrowing costs. 

Hospitals want to deliver the highest quality care at the lowest 

possible costs, but they have been thwarted in recent months in 

their attempts to keep financing costs low by conditions in the financial markets. One idea would be to allow hospitals to rely on 

some Federal support of their existing obligations so they could be 

refinanced to lower interest rates. From what I understand, such 

backing is currently authorized under the HUD 242 Hospital Mortgage Insurance Program. But HUD has never issued regulations 

implementing that authority. Mr. Apgar, would this be something 

HUD could explore to provide low-cost financing for hospitals or do 

26 

you have any other thoughts on providing low-cost financing for 

hospitals, sir? 

Mr. APGAR. Hospitals are an important part of our mission and 

that particular 242 program is something we’re reviewing now to 

see how we can respond to questions like you asked. 

Mr. MOORE OF KANSAS. Any idea how long that review might 

take, how long it’s going to take? 

Mr. APGAR. I don’t have a timeline on it, but I do know that as 

we gear up with the new team, that is high on our list of priorities. 

Mr. MOORE OF KANSAS. Very good. Thank you, Mr. Chairman. I 

yield back. 

The CHAIRMAN. The gentleman from Florida, Mr. Putnam. 

Mr. PUTNAM. Thank you, Mr. Chairman. Mr. Leppert, you made 

the point to Mr. Posey that any of these enhancements should be 

temporary. Could you define that for us, driven by market conditions? 

Mr. LEPPERT. I think it is driven by market conditions and the 

hope is, and I think it’s the hope of all of us, that we’re going to 

see a normalcy of market. But the reality of it is, we’re not there 

today. We have lost the insurers, the enhancers, they have gone 

away, so there’s going to have to be some type of support mechanism, at least for a period of time. Now again, I want to stress 

again, from the City’s standpoint, we’re not looking for some longterm program and we’re not looking for any type of a bailout of operating budgets. We’re fundamentally talking capital budgets and 

we’re talking a period of time to give some normalcy to this so that 

the private side can come back in, and I think over time, it will. 

I can’t give you an answer when it will, but I think over time it 

will come in. But until that point of time, as I said in my testimony, there are hundreds of billions of dollars worth of projects out 

there that are important to re-energize the infrastructure of this 

country, as well as create jobs. 

Mr. PUTNAM. But given the uncertain state of State and local 

budgets, given the uncertain state of the Federal budget, but you 

look at what’s going on in California, look at what Florida legislatures just struggled with, isn’t this just, you know, the increased 

rates? Is that not just market discipline? In other words, you refer 

to normalcy. What is the new normal, given these circumstances 

we’re operating under? 

Mr. LEPPERT. Well, I think normal, coming back to some historical sense of the spreads between municipals/corporates, municipals/Treasuries, those sorts of things. I mean, clearly, to look at 

those spreads, those are so far out of historically what we have 

seen that it clearly puts cities and State governments in a precarious position for financing going forward. And as I said, it’s holding 

up projects that we believe are very important. 

Mr. PUTNAM. Mr. Watkins, can you describe for us, share some 

of your experiences in terms of walking back to last summer when 

the bottom fell out of the market and any impact that Federal response has had on liquidity and pricing and where you find yourself today as a result. 

Mr. WATKINS. I think that there have been tangible benefits to 

the market in general. In terms of restoring confidence to the market and you see it with respect to the interest rates for large freVerDate Nov 24 2008 13:08 Oct 19, 2009 Jkt 051596 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\51596.TXT TERRIE
27 

quent issuers with very simple credit structures. That market is 

functioning reasonably well now, so our ability to issue State general obligation bonds at favorable rates is good. But, then you look 

at the vast majority of issuers across the Nation, which are smaller, infrequent issuers. There are cities, counties, and school districts across the Nation that have need to access capital for infrastructure. And when you fall into the A category, you fall off a cliff. 

And I’m talking to the tune of 100 basis points, or 1 percent. Now, 

that may not sound like a lot, but when you do the bond math, and 

extrapolate the cost of that 1 percent to borrowed money over 30 

years, the cost to a local government is significant. And it’s an embedded cost that’s there for the next 30 years. It’s there incrementally, but when you look at the cost, the aggregate cost of that borrowing, it is significant. And it’s occurring at a time when budgets 

are already under pressure. And that’s the segment of the market 

that needs the temporary assistance to gain access to markets and 

normalize the interest rates and the cost of funding capital 

projects. 

Mr. PUTNAM. Mr. Leppert, did you want to add anything to that? 

Mr. LEPPERT. I think that says it all. The only thing I would add 

to that is, keep in mind that it may not just be large and small 

players at the State and local level. It very well could be a large 

player, but the project itself is rated an A category, so you will fall 

into that. So, don’t assume it’s just big versus small. It could be a 

larger player at the State or at the local level that has a project 

that falls into the A. 

Mr. PUTNAM. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. We now have the first of our two mayors and I 

now recognize the former Mayor of Summerville, Massachusetts, 

Mr. Capuano. 

Mr. CAPUANO. Thank you, Mr. Chairman. Mr. Mayor, have you 

been through a bond rating review for your City? 

Mr. LEPPERT. I personally have not. 

Mr. CAPUANO. Okay. I have, and it wasn’t much fun. When you 

do it, have you dealt with any of the bond rating people, at all, that 

have come to your City on an individual issue? 

Mr. LEPPERT. I have. Both on the municipal and on the corporate 

side, yes. 

Mr. CAPUANO. Okay. Did you feel as though he had any ability 

to change whatever it is they came in with, a preconceived notion? 

Or did you feel like you had to be nice to somebody that you knew 

was going to stick it to you, anyway? 

Mr. LEPPERT. In both cases, we tried to make the arguments as 

well as we could. 

Mr. CAPUANO. Ha ha ha ha ha. Yes. Sure. And did they listen? 

Mr. LEPPERT. I would say, in a number of cases, yes, they did listen. Perhaps we could influence in other cases. It may very have 

been as you said where the decision was made before people 

walked in the room. 

Mr. CAPUANO. Now, before you were mayor, what did you do, Mr. 

Mayor? 

Mr. LEPPERT. I was a corporate executive. I ran some relatively 

large companies across the Nation. 

28 

Mr. CAPUANO. Okay. So, do you, now you have done both sides. 

Do you think it’s fair, reasonable, thoughtful, either in a business 

sense, an equitable sense, any way in particular that for some reason, corporate bonds should be viewed differently than municipal 

bonds? Or do you think it should just all be based on, you know, 

the ability to repay those bonds? 

Mr. LEPPERT. As it was indicated in my testimony, I think it 

ought to be driven by hard economics. And I think, as was pointed 

out to an extent in the testimony, to an extent in the charts that 

you see to the right, that’s a difficult conclusion to come to under 

today’s scenario. Now, I would also tell you that before we saw this, 

what happened in the credit markets, there were moves of some 

agencies towards this, of combining and doing that. So, again, this 

isn’t pushed into unknown territory. There were agencies that were 

moving to this earlier. 

Mr. CAPUANO. Right. Moving towards them is all well and good, 

but Dallas is a relatively sizable community with some leverage, 

but I’m sure that you have lots of smaller communities that surround Dallas that don’t have the leverage that you do, that would 

maybe feel a little bit more strongly about their inability really negotiate. 

Mr. LEPPERT. And I would tell you, I’m representing cities across 

this Nation, small to large. 

Mr. CAPUANO. I know. Right. And I heard earlier, I guess apparently, every city and town is just throwing money away? That 

there’s no reason you would absolutely need on the one chart of 

only $25,000. But I don’t know anybody who’s out for a million dollar GO, anyway. People go out for GOs, it’s usually, I don’t care 

what size the city is, if it’s 10 million or much more than that, I’m 

sure that Dallas would just not care about an additional $250,000 

or so that you could use to either hire cops or give taxpayers a 

break, or anything else. I’m sure you don’t need that, is that a 

proper—? 

Mr. LEPPERT. If this answers your question, I would tell you, I 

think we do a very good job fiscally, of managing our portfolios 

across-the-board. 

Mr. CAPUANO. And I would imagine that if you were to just ig- nore $250,000 sitting on the table, the people of Dallas probably 

wouldn’t notice that. Do you think that’s a fair statement? 

Mr. LEPPERT. I can tell you, being a mayor, especially coming 

from the private side, people notice everything and they usually do 

it at the grocery store. 

Mr. CAPUANO. Exactly right. Exactly right. The Mayor has hit it 

directly on the street level. People see what you do. If you had the 

audacity or any of my mayors, any of your mayors had the audacity 

to leave that kind of money sitting on the table, if you had something to do about it, first of all, I think people would know about 

it, second of all, I think they would fire you as quickly as possible. 

And they wouldn’t be too nice about it. So, anybody who thinks 

that this money is just sitting there, you know, that we don’t want 

it, but we enjoy overpaying interest rates with taxpayers’ dollars, 

I take that as a little bit of a personal offense as a former Mayor. 

You don’t have to say that, because you’re much nicer than I am. 

I do. And I would tell you to tell your colleagues at home that at 

29 

least I’m sitting here defending their honor because I don’t mind 

disagreements, my understanding, we may come from different 

philosophical views on certain things. But when it comes to money, 

nobody that I know in a local government wants to waste it. We 

may have different views as to what to do with it, but we want to 

be able to use it to the benefit of our taxpayers and our constituents to the best of our ability. And I would imagine that is something that is shared by the Conference. 

Mr. LEPPERT. Absolutely. And again, I would argue, at the local 

level, it’s the most transparent of all elements of government. 

That’s also why I was trying to stress that what we are talking 

about, the U.S. Conference of Mayors, is not dealing with trying to 

fill past budget shortfalls, we’re not trying to fill operating gaps, 

what we’re largely talking about is the availability of credit markets for capitol projects going forward. 

Mr. CAPUANO. Right. And Mr. Mayor, I’m going to close because 

I think, obviously, this legislation is going to move forward and I 

think the time is right to treat cities and towns and States and 

county governments the same as all corporations. The same as everybody else. That’s all. Not extra, just fair. At the same time, I 

would ask that the next time that the Conference sends somebody, 

I want to see somebody who has been through a rating review. 

That’s what I want to see. I want to see somebody who has had 

the lovely privilege of having to spend days on end, spending tens 

of thousands of dollars of taxpayers’ money, to convince somebody 

to do something that they’re not going to do anyway and they’re 

going to base it on their own judgment from 2,000 miles away. And 

actually, when you go through it, let me know. Because I’m sure 

you’ll have a fun time with it. 

Mr. LEPPERT. As I said, for 30 years, I spent time working on the 

financial side, so I understand exactly where you’re coming from, 

and I have a real sensitivity on the public side to it. I would add, 

and I would like to stress this point, that if this legislation moves 

forward, and it talks about a Fiscal Year of 2011 or beyond, even 

2010, that doesn’t address the situation. 

Mr. CAPUANO. I agree. 

Mr. LEPPERT. The situation needs to be addressed today. If we’re 

going to make an impact on the economy, it has to be literally trying to put the enhancement, the liquidity, the sorts of things we’re 

talking about today, put those in place today. Down the line, I hope 

the economy comes back, some of the issues that we have talked 

about settle down. If we’re going to make an impact, it has to be 

now, it has to be today. 

The CHAIRMAN. If the gentleman would yield, that’s why there’s 

a package of bills. Because there are bills that address the regulatory side, the immediate and then going forward. And the other 

thing, I would be particularly interested if the Conference next 

time sends someone, because I would be very interested to meet 

him, who is not nicer than Mr. Capuano. We would be looking forward to that. He would make a heck of a witness. 

Mr. CAPUANO. Mr. Chairman, I believe he’s already sitting in the 

Chair. 

The CHAIRMAN. Yes, but I’m not the witness. The gentleman 

from California. 

30 

Mr. CAMPBELL. Thank you, Mr. Chairman. The question for Ms. 

Haines and frankly, anyone is, Ms. Haines, you talked about the 

inequities between the rating agencies’ view of municipal debt and 

actual defaults versus corporate. The disclosures are not equal, as 

well. Would you support equal disclosures for an equal rating? 

Ms. HAINES. Our Chairman has on record as stating her belief 

that investors in municipal securities deserve the same strong investor protections that are enjoyed by investors in other markets. 

The lack of regulation of municipal securities and municipal offerings is currently a gap in the investor protection scheme of the 

Federal Securities Laws and we believe Congress should review 

this. 

Mr. CAMPBELL. So, is that a kind of a yes? 

Ms. HAINES. Pretty close. 

Mr. CAMPBELL. Okay. Does anyone else have a differing view on 

this panel? 

Mr. WATKINS. I would take exception with that in the sense that 

in looking at the regulatory burdens that would be imposed on 

issuers, that the burdens of those regulations, and compliance with 

those regulations would far outweigh the benefits that investors derive from that. And the reason that I say that is, we operate in the 

sunshine. Everything that we do is openly disclosed and available 

to investors all the time. 

Mr. CAMPBELL. Okay. Does anyone in this room follow the irony 

of a government talking about the cost and burden of regulation 

not being worth the benefit? That’s just a side comment, but since 

what governments do is regulate private industry, and private industry feels that, and now here is at least one government saying, 

‘‘Regulation can be burdensome and costly and not worth the benefit.’’ But anyway, if it’s burdensome, costly, and not worth the benefit for municipal governments, I don’t know why it is not equally 

burdensome and costly. You can argue whether it’s worth the benefits on a private issuer. Mr. Wilcox, let me ask you, if I may, about 

one of my concerns. We talk a lot these days about moral hazard. 

And if the Federal Government were to, through this insurance 

mechanism in one of these bills, basically backstop all, potentially 

all, State and municipal debt, isn’t there a moral hazard? My State, 

California, has gotten itself into a big problem. Shouldn’t the State, 

if you will, bear some consequence for that and not have the Federal Government come in and shield the State from any of the negative consequences of an irresponsible budget? 

Mr. WILCOX. I think that’s intrinsically a fiscal consideration. 

The Congress would have to make that decision as to how to balance the considerations. They are important considerations that 

you raise in your question but I think those really lie outside the 

purview of the Federal Reserve. 

Mr. CAMPBELL. It is a legitimate concern, though, is it not? 

Mr. WILCOX. Yes. Yes, sir. I am not suggesting they are not legitimate concerns; I just don’t think the Federal Reserve has any 

nexus with those. 

Mr. CAMPBELL. How about something more specific to the Federal Reserve. What is the Federal Reserve’s view on being asked, 

or to actually buy some municipal securities out there in order to 

prevent auction failures. 

31 

Mr. WILCOX. Well, as I mentioned in my written statement, I 

have, and the Federal Reserve has a number of concerns about 

those. We are glad to see in the draft language that was distributed last night the insertion of the language for unusual and exigent circumstances. We think it has been very important that the 

usual conditions for emergency functions of the Federal Reserve 

have been imposed. A very high bar has been set on our intervention in these markets and we think that’s appropriate. 

We are also, as I highlighted earlier, quite concerned about the 

potential political implications for us being interposed in these decisions. We are very focused on having an exit strategy, being sure 

that we can control the size of our balance sheet so that the Open 

Market Committee can be assured of being able to carry out its 

congressional mandate for— 

Mr. CAMPBELL. Let me, so my time doesn’t completely run out, 

just ask one last question. You mention that the municipal securities market is functioning fairly well. Can’t most municipalities, if 

they price it right, and States, sell their, the auction rate security, 

there’s an argument that never should have been there, but anyway, can’t they sell in today’s market? 

Mr. WILCOX. I think as you have heard reflected today in the testimony that it’s a mixed bag. It’s a patchwork quilt, that some of 

the larger issuers, the better rated issuers, are able to issue securities and, indeed, the issuance over the 4 months of this year has 

been comparable to the issuance over similar periods before the 

onset of the financial crisis. For other issuers, lower rated, smaller 

issuers, circumstances are quite difficult. 

Mr. CAMPBELL. Thank you. 

The CHAIRMAN. Before I yield to the gentleman, I’m going to take 

30 seconds, Mr. Wilcox, just to say, you said that under Section 13- 

3 powers of threat, it sets a high bar and as an exit strategy, the 

largest single expenditure under that was to AIG. And I must tell 

you that as I look at the AIG issue, without commenting on whether it was right or wrong, that’s an odd definition of both the high 

bar and a good exit strategy. I would think most cities, frankly, 

would have an easy time in States meeting that AIG standard. The 

gentleman from Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. And I thank all of the 

witnesses for appearing. Ms. Haines, I would like to ask you a 

question, if I may. In your testimony, you indicate that there are 

some activities that are of concern to you. And you talk about the 

pay to play practice. Would you please give me just a brief explanation by way of example of what pay to play is? 

Ms. HAINES. Pay to play is a phrase that is used in the municipal 

industry a fair amount to refer to persons who make political contributions to issuer officials in order to obtain business from that 

issuer. 

Mr. GREEN. And is this a lawful practice currently or is it unlawful currently? 

Mr. HAINES. It is lawful currently. There is a restriction on 

broker/dealers under a municipal securities rulemaking Board rule, 

G–37. Political contributions, as free speech, are not prohibited 

under any circumstances. However if a broker/dealer makes a conVerDate Nov 24 2008 13:08 Oct 19, 2009 Jkt 051596 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\51596.TXT TERRIE
32 

tribution to an issuer official, then that broker-dealer is prohibited 

from doing business with that issuer for a 2-year period. 

Mr. GREEN. Have you had an opportunity to peruse the various 

instruments that we are proposing in terms of enactments of law? 

And I ask because I’m curious as to whether any of these would 

address the pay to play circumstance that you find to be invidious. 

Ms. HAINES. We believe that the bill, with respect to municipal 

financial advisors, would give the Commission the authority to address pay to play practices. 

Mr. GREEN. And would it give you the authority to address this 

in a punitive, penal fashion? Or would this be by way of civil remedy? 

Ms. HAINES. By way of civil remedy. The Commission does not 

have any criminal authority. 

Mr. GREEN. Do you find, have you had circumstances, and I believe from your testimony you have indicated that you have, but 

have you had circumstances, for the record, wherein there were situations that you wanted to pursue and prosecute civilly, but you 

were unable to do so because of a lack of legislation? 

Ms. HAINES. Yes, there have been. In particular, the lack of a 

clear, consistent standard of care. The lack of the fiduciary obligation included in the legislation that a financial advisor owes to its 

client has been one of the stumbling blocks, when we have tried in 

the past to take anti-fraud enforcement actions involving financial 

advisors. Additional authority to regulate them would simplify any 

enforcement activities, of course, because it is much easier to bring 

a case against someone for breaking a rule than to undertake a full 

anti-fraud investigation. 

Mr. GREEN. Mr. Chairman, I thank you, and I yield back the balance of my time. Thank you, Ms. Haines. 

The CHAIRMAN. The gentleman from Texas, Mr. Hensarling. I 

know, by the way, Mayor, I know you have to leave at 10:30. We’ll 

do Mr. Hensarling, we’ll do our former Mayor, and then we’ll excuse you. The rest of the panel, I know, can stay and we’ll finish 

up. Mr. Hensarling. 

Mr. HENSARLING. Mr. Chairman, let me offer my apology to the 

panel members. I have been straddling two hearings, this one and 

budget, so I missed the test. And we may be covering some old 

ground here. And I offer my apology for that. 

I’m sure there has been a healthy discussion of the role of our 

credit rating agencies. But in your own experience, has there been 

an over-reliance upon the rating agencies? And as currently structured, has there been an incentive to do less due diligence, simply 

because of the, for lack of a better term, oligopoly that has been 

set up with the nationally statistical recognized NRSROs? 

Whomever cares to comment? 

[no response] 

Mr. HENSARLING. Well, seeing no takers, the gentleman from 

Missouri had his chance last evening. 

As I look at the Federal Government’s track record with reinsurance programs, or insurance programs, again in my opening statement, I talked about the PBGC having an historic deficit. The Federal Flood Insurance Program was never supposed to need a taxpayer infusion. We know what is happening with Social Security. 

33 

For those of us who care passionately about the level of debt that 

is being placed upon future generations, for those who represent 

constituencies who may benefit from this program, given the history of the Federal Government, why should we feel convinced that 

ultimately the Federal taxpayer is not going to have bear even a 

greater burden than he and she already are? 

Mr. WATKINS. I would submit to you the historical level of repayment of municipal securities in general is a very safe investment 

in protection of the Federal Government dollars investing and supporting local governments in this fashion. 

I think the risk of nonpayment is overstated. And if you look at 

history and the level of defaults of municipal securities, it’s virtually nonexistent. And relative to the other investments the Federal Government has made, I think this would be a wise and prudent use of resources available. 

Mr. HENSARLING. I guess I would have two reactions to that, Mr. 

Watkins. One, if they’re that safe, why are you here requesting the 

assistance in the first place? And two, I’m not going to push back 

on what you said, but I must admit it feels a little bit for some of 

us like deja-vu all over again, when we had representatives of 

Fannie Mae and Freddie Mac coming before us for years and years 

and years, telling us how terribly safe their investment portfolios 

were. And we all know how that story ended. 

So I don’t doubt what you say. I don’t doubt that you believe it. 

But again, some of us are a little uncomfortable, and it feels a little 

bit like we have been down this road before. 

And so again, those of you representing constituencies who might 

benefit from this program, at least for some of us, have a burden 

of persuasion that we’re not going down Fannie and Freddie Lane 

once again. 

As I understand it—and I haven’t read carefully the four or five 

pieces of legislation that are being bundled together for the purposes of this hearing—but theoretically I believe these are going to 

be temporary programs. 

Now temporary programs in Washington are fairly rare animals. 

You can certainly look at the TRIA Program as a data point. But 

if it is indeed a temporary program, in your opinion, how long 

should the program exist? What should be its length? What should 

be its duration? And why? 

Anybody who cares to comment on that. 

Ms. HAINES. I can’t speak to the other bills; but the bill to regulate municipal financial advisors we think should be permanent. 

Mr. HENSARLING. Any other comments? 

Mr. LEPPERT. I would say on liquidity enhancement, again we 

think that should be a short-term bill. I don’t have a perfect number for you but clearly it should be well under 5 years, and probably in the area of only a couple of years. 

Mr. HENSARLING. I see I’m out of time, but Mr. Mayor, I want 

to thank you for taking care of the graffiti near my home, but 

there’s a certain pothole I need to talk to you about. 

I yield back the balance of my time. 

The CHAIRMAN. The gentleman from Missouri. It looks like we’re 

going to have some votes, but we can get in a couple more questions. 

34 

Mr. CLEAVER. Thank you, Mr. Mayor, for being here. 

I served as mayor during the 1990’s, and we did not have at that 

time this derivative now called ‘‘swaption,’’ which was designed especially to rip off cities. 

And when you look at the swaption and the fact that, well it was 

supposed to have been a way of protecting municipalities, States, 

and cities from interest increases; but it turned out to be a loser 

in the long run, just like it has in the stock market. 

And this bill will call for the Office of Finance within the Treasury Department to overlook this area. Do you believe that we have 

had adequate oversight in the past of municipal bonds? 

If you look, most cities are going to have a triple-A rating or close 

to it, because in Texas where I was born and raised, like Missouri, 

where I live now, there is a State law that says your budget must 

be balanced. So there is virtually no way that you can have anything but a triple-A bond rating. 

Today, Bear Stearns may be able to get a better interest rate 

than Dallas. And they collapsed. I am hoping that you would also 

agree that this bill is absolutely necessary, and that you would support the public finance within the Treasury Department of that office being established. 

Mr. LEPPERT. Again I think, representing the U.S. Conference of 

Mayors, we clearly answer to the affirmative of that. 

I would point out, as you said, though, that even though you may 

have entities, cities and States that have the highest rating, they 

may need to go out for individual projects and those projects without enhancement would be down in the A category or more, as I 

said earlier, in kind of the medium range of the market. 

That’s where the enhancement becomes so important. So even 

though you may be talking about a triple-A—you may have an individual project that needs enhancement. 

Mr. CLEAVER. Right. 

Mr. LEPPERT. And enhancement— 

Mr. CLEAVER. Right. Thank you, Mr. Mayor, I appreciate you 

being here. 

Mr. LEPPERT. Thank you, sir. 

Mr. CLEAVER. Ms. Haines, are you familiar with the swaptions? 

Ms. HAINES. Somewhat. 

Mr. CLEAVER. How could that happen? 

Ms. HAINES. That’s an excellent question. I’m a lawyer rather 

than on the finance side of the equation. 

Mr. CLEAVER. Okay. 

Ms. HAINES. So I can’t tell you— 

Mr. CLEAVER. You can’t tell me why nobody was put in jail for— 

Ms. HAINES. In any kind of detail, other than when the rest of 

the economy and the markets went out of whack, so did they. 

Mr. CLEAVER. Well, let me—you cannot in the United States of 

America buy a car with a one-in-five chance of exploding. Our consumer protection laws will not allow that. You can’t buy it. 

You know, there is no way you can go to a dealership, go into 

the showroom, and cars are out there with a sign on them, ‘‘Onein-Five Chances for this Car to Explode.’’ Do you agree? 

Ms. HAINES. I hope so. 

35 

Mr. CLEAVER. How can a product with those same odds be sold 

to a municipality, a one-in-five chance of blowing up the city’s finances, without anybody noticing? 

Ms. HAINES. The Commission is specifically prohibited from regulating any kind of derivative. And we only have anti-fraud authority over securities-based derivatives. So we have been unable to 

have any impact in that field. 

Mr. CLEAVER. Who does? 

Ms. HAINES. I don’t know. 

The CHAIRMAN. Nobody as of now. 

Mr. CLEAVER. That is the point I am making. Cities are being 

hurt, and we have no agency, I mean, or no super-regulator or 

mini-regulator or anybody doing anything. And it is hurting municipalities, which means it hurts the Nation. 

I think has to be corrected. Hopefully this legislation will begin 

to address those issues. 

Mr. Mayor, I give you the remainder of my time, if you have any 

comments before you leave. 

Mr. LEPPERT. Yes. We just appreciate the opportunity again, 

speaking on behalf of the U.S. Conference of Mayors, for the chairman and the committee to address this issue. We think it’s an important one. 

And again, as I want to stress again, it is not a long-term issue. 

It is a decision and an issue that has to be addressed today. That’s 

where the impact will be made. 

Mr. CLEAVER. Thank you for being here. 

The CHAIRMAN. Let me say, Mr. Leppert, you are excused. 

We are going to have some votes. I’m going to call on Mr. Manzullo and then Mr. Foster. We are going to dismiss this panel. We 

will start with the second panel, and we will begin the questioning. 

The gentleman from Colorado has a quick question. But let me 

start with Mr. Manzullo. 

Mr. MANZULLO. I read in the paper yesterday where a municipality in Indiana is no longer going to buy Treasury bonds as investments, because they consider the government to be a poor 

choice for investments, because this municipality also had bonds at 

Chrysler. And the government screwed them royally on those 

bonds. 

And Mr. Mayor, my question to you is: If the government can 

come along and do that to municipalities, I mean, don’t you think 

that’s wrong what they did to this municipality, in discounting 

those bonds? 

Mr. LEPPERT. I am afraid I am not familiar with that instance. 

If I knew the details, I would be happy to answer, but without 

knowing the details of it, I would feel uncomfortable. 

Mr. MANZULLO. But this is a warning across the bow. If municipalities say it is no longer reliable to invest in U.S. securities, because of the way the Federal Government treats bondholders by 

taking over companies, firing their executives, that is pretty scary. 

Wouldn’t you agree, Mr. Mayor? 

Mr. LEPPERT. Well, I will tell you that in every capital market, 

the underlying strength of that capital market is a belief that 

treasuries are a zero risk. 

Mr. MANZULLO. All right. Well, that— 

36 

Mr. LEPPERT. And that drives everything—corporate, everything 

else— 

Mr. MANZULLO. Well, they probably thought the same on tripleA bonds that they had with GM and Chrysler at the same time. 

But I’m just saying that perhaps that is going to cause some rethinking on the part— 

I think that the Treasury needs to understand that a lot of municipalities not only lost money in pension funds by investments 

into the regular market, but they have also money as a result of 

buying those triple-A bonds. And they have been hurt that way 

also. 

The Federal Government better think again before it goes in 

there and devaluates bonds and prefers people in subordinate positions to bond-holders. 

Just a comment. 

And thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Illinois. And we will get to 

the gentleman from Colorado. The first votes are the chairman 

vote—and I am going to stick around—but I am going to dismiss 

the panel. 

The gentleman from Missouri will temporarily preside. Mr. 

Mayor, you are excused. You said you had a plane to catch? 

Mr. LEPPERT. Thank you, sir. 

Mr. FOSTER. Right, very well— 

The CHAIRMAN. The gentleman from Illinois, the gentleman from 

Colorado, and the gentleman from New Jersey. 

Mr. FOSTER. Right. Okay, my question is a quick one. Now I am 

a scientist, and I find this business of having assigning these ratings, which are essentially names for numbers, just absolutely bizarre. In science, we do name numbers. We have Pi and E and so 

on. But when we talk about Pi, it’s one number. And we’re not in 

a situation like BAA can mean something in one context, and then 

an entirely different range of numbers in another context. 

And I was wondering, my specific question is: Is there a meaning 

when you say ‘‘BAA?’’ Do those three digits, each position, have any 

specific meaning? Is there any logic to the specific names? 

Can anyone answer that? 

Ms. HAINES. Each rating agency is required to establish its own 

criteria, which are made public, for each of its ratings. 

Mr. FOSTER. Okay. So are you aware of any specific meaning for 

the first, second, and third digit in BAA, for example? 

Ms. HAINES. I would have to go look it up. 

Mr. FOSTER. Okay. So at least it’s not a well-known understanding? 

Ms. HAINES. Right. Not that I am aware of— 

Mr. FOSTER. And so have been there been proposals at any point 

to simply report the number? To say that look it, the probability 

is 10 to the minus 3, and 10 to the minus 4 of default, and just 

report the number? Instead of giving it an elaborate name that sort 

of, to my mind, makes the thing a lot more opaque? 

Have there been suggestions ever, to your knowledge, of just reporting the number as a number, for the default probability? 

Ms. HAINES. I am not familiar with any suggestions like that. 

Mr. FOSTER. Okay. 

37 

Ms. HAINES. But as I said, I am a lawyer, not a finance person. 

Mr. FOSTER. Okay. Thank you. 

I yield back. 

Mr. CLEAVER. The gentleman from New Jersey. 

Mr. GARRETT. You know, I’m going to, since I just came in, I’m 

going to yield, and then come back to me. 

Mr. CLEAVER. The gentleman from Colorado has shamed the gentleman from New Jersey. 

[laughter] 

Mr. CLEAVER. So we recognize the gentleman from Colorado. 

Mr. PERLMUTTER. I thank my friend from New Jersey. Mr. 

Wilcox, I have questions for you. I want to talk about exigent and 

unusual circumstances. And the chairman was a little kinder than 

I plan to be. 

Here we have municipalities who are under siege, and the work 

that they have to do will be investments for many years into the 

future, irrespective of what my friends on the other side of the aisle 

have to say. Yet using exigent and unusual circumstances, you plunk $30 billion behind Bear Stearns on about 24-hour notice; you support AIG, 

and who knows how many other billions of dollars have been put 

into place? Yet, you don’t support Lehman Brothers, which goes 

bankrupt, which affected a number of municipalities in the Denver 

metropolitan area and in Colorado. 

So explain to me again why supporting Bear Stearns and AIG is 

something that the Federal Reserve can do under exigent and unusual circumstances, but not supporting municipal bonds that were 

affected by the Lehman Brothers bankruptcy, where the Federal 

Reserve chose not to underwrite that collapse? 

Mr. WILCOX. The Bear Stearns and Lehman Brothers situations 

came up before the TARP was enacted. And as Chairman Bernanke 

has said many times, he is very grateful for the authority that was 

provided to the Treasury Department under the TARP, and very 

glad to be out of the business of stepping into those situations or 

being confronted with the need to contemplate stepping in under 

those situations. 

Look, my purpose here today is not for one second to question the 

difficult circumstances that State and local governments are operating in. We are in the midst of a financial crisis of historic proportions. We’re now well into a recession that is on track for being the 

deepest recession in the post-war period. 

My remarks are essentially framed around the following idea. We 

have a nail and there are two questions that that raises. 

The first is: Does the nail need hitting? That’s an issue to be resolved by the Congress. 

The second is: Is the Federal Reserve the best hammer for hitting that nail? Our view is that we have significant misgivings. 

While we do not prejudge the Congress’ answer to whether that 

nail should be hit, we have significant misgivings about using the 

Federal Reserve as the hammer for hitting that nail. 

Mr. PERLMUTTER. And I would too, except that it’s hard to pick 

and choose here. And in the instance that I’m speaking about—and 

first of all, I’m supportive of TARP money being used to assist municipalities in rebuilding their infrastructure and moving forward. 

38 

I mean, I don’t think there’s any question about that. And that 

was put in the TARP II legislation that we passed to the Senate, 

that’s still sitting over there. 

But for me, it’s more of a question of on September 15th, you, 

meaning the Federal Reserve, chose not to support Lehman Brothers. My State had a pooled investment group that had paper in 

Lehman Brothers. There was then a run on Lehman Brothers 

paper, causing the primary fund to break the buck. And we’re still 

trying to collect on that. 

And so I don’t mean to be mixing apples and oranges, but I’m 

seeing you come in some spots, but not in others. And I don’t understand the rationale behind that. 

Mr. WILCOX. Again, the historical context and the other authorities that are available are critical to understanding the difference 

in situation. The availability of the TARP authority now at this 

point would mean that we would be out of the business of intervening in that kind of situation. 

Mr. PERLMUTTER. So you think the TARP now alleviates the Federal Reserve from coming in, using the exigent and unusual circumstances? At least as it applies to municipalities? 

Mr. WILCOX. I can’t prejudge the Board’s decision on a particular 

fact set. What I can say is that the availability of the TARP would 

present the Board with a very different and importantly different 

circumstance, if confronted with some of those earlier situations. 

The critical issue from the Board’s perspective in making that determination about unusual and exigent circumstances, is whether 

a particular market presents significant risk to financial stability. 

That is what they are focused on. 

Mr. PERLMUTTER. All right. I thank my friend from New Jersey 

for yielding to me, and I yield back. 

The CHAIRMAN. The gentleman from New Jersey will ask his 

questions. We will then dismiss the panel. We will reconvene, and 

continue with the second panel. I apologize, but we don’t have any 

control over it. 

The gentleman from New Jersey. 

Mr. GARRETT. I thank the chairman, and I will be brief. 

Just a little bit on the last discussion with regard to Lehman’s, 

and I know we have been through this around and around on that. 

One of the arguments is this, that you can say whether the government let them fail or whether the market let them fail. The argument in one sense is that the market let them fail, because in 

a sense it’s the market players who are going to decide whether or 

not that they are going to actually engage in transactions with 

Lehman. So I think you can make that case. 

A step back from that, of course, though, is: Why did they make 

some of those decisions that they did? And why did Lehman make 

some of the decisions that they made? 

That can be attributed to what the government did previously, 

back to the signals that they were sending, back with Bear 

Stearns, that we would get involved in that situation, long-term 

capital before that, although it’s slightly different with the New 

York Fed and the like. 

39 

Government set up certain expectations, and then when they 

weren’t followed through on, then the market responded, you might 

say, in reliance upon that. And that’s why Lehman failed. 

My question is, I guess it may be the same, or along the lines 

of the comments of Mr. Hensarling from Texas. 

This is just one question. We just came from a budget hearing, 

and in that we heard about the stimulus and the effects of it on 

the economy or the lack thereof. And I know here we’re talking 

about what the connection is you are talking about and what’s happening out in the State of California and the problems and across 

the country as well with regard to the municipal market and so on. 

And the point that was made over in Budget is this: That we had 

the Administration come out with a stimulus plan, making certain 

projections as to where we were going to be if we took action, and 

spent actually $787 billion on the stimulus, as far as unemployment rates—and I had certain charts—I don’t have them up here— 

and where we would be if we didn’t do anything, the line of course 

being higher. 

Well now we are in the month of May, and the charts that I had 

over in Budget show that in actuality, we are at higher unemployment rates at 8.5 percent in March and 8.9 percent in April, so the 

rate of job loss is considerably worse than what the President and 

the Administration projected, with or without the stimulus. 

In other words, even though we did the stimulus, and they said 

that would be an improvement, actually things turned out worse, 

despite doing that. 

The CBO Director made the comment that, well stimulus may 

take a little time to get moving out in 2009. You may see some of 

the effect in 2010. But then the rejoinder to that, of course, was 

that most of the money won’t come out until 2010. 

So here’s my question to you. Congress has already taken decisive, bold action, the other side of the aisle would argue, with regard to trying to get the economy going, trying to help municipalities, trying to help States, through the stimulus. Is it your opinion 

that the stimulus, as statistics showed in Budget, was of no effect 

and actually did more harm than good? Or is it that it was good, 

and that maybe we should—before we take any of the action that 

is suggested here by the chairman on the short term on some of 

these expenditure items—maybe we should just wait a little while 

and give the stimulus a little bit more time to take effect. 

So which is it? It didn’t really work, or we need to give it a little 

bit more time? 

Mr. WATKINS. I can comment on how critical the stimulus money 

was in balancing the State’s budget, when the legislation just completed their work 2 weeks ago and tell you that it was absolutely 

critical. And the support for both credit enhancement as well as the 

liquidity support is to address a different problem, and that problem is with respect to being able to borrow money to fund infrastructure projects. So I would say that is a problem that has yet 

to be addressed. 

Mr. GARRETT. But remember, that was part and parcel of the 

package that the Administration sold on the stimulus package. The 

stimulus was not just to say that we were going to put in ground 

in the shovel projects, which as you know turned out to be only 3 

40 

or 4 percent of the overall package. It has a much broader goal in 

mind, one of which was the overall economic picture at the time: 

The tight credit market, the liquidity issues, as well. 

So it was supposed to be doing a number of those things. I only 

hit on the one point here with the unemployment numbers. The 

other numbers, the CBO would say, you actually have seen a loosening of that. 

So is it that maybe they did some good for your town, or what 

have you; but maybe what we need to do is just give it a little bit 

more time, so we don’t have to take this action now, and put this 

action aside a little bit, until we see whether it kicks in, as CBO 

indicates it may kick in next year? 

Mr. WATKINS. So our view is that the stimulus package is in 

combination with the other policy actions, having an important affect now, along with some of the financial rescue steps that have 

been taken by the Federal Reserve. 

I think it’s up to the Congress as to whether more should be 

done. 

Mr. GARRETT. Okay. Thank you. I appreciate it, thank you. 

The CHAIRMAN. Time has expired. The panel is dismissed We appreciate it. I think it has been a very useful hearing, and we will 

reconvene probably in about 20 to 30 minutes with the next panel 

for probably an hour-and-a-half. 

[recess] 

The CHAIRMAN. The hearing will reconvene. I apologize. There 

was an unexpected resolution involving another controversy, unrelated. It took more time than it should have, and I apologize and 

appreciate the indulgence of the witnesses. 

We will go until about 2:15, so that gives us a good deal of time, 

and we will get right into the witness list, as soon as I find it. And 

I have it now. 

We will begin with Michael Marz, who is vice chairman of the 

First Southwest Company on behalf of the Regional Bond Dealers 

Association. 

Mr. Marz? 

STATEMENT OF MICHAEL J. MARZ, VICE CHAIRMAN, FIRST 

SOUTHWEST COMPANY, ON BEHALF OF THE REGIONAL 

BOND DEALERS ASSOCIATION (RBDA) 

Mr. MARZ. Good afternoon. Thank you, Chairman Frank, Ranking Member Bachus, and members of the committee. I’m pleased 

to be here. 

The Regional Bond Dealers Association was formed a little over 

a year ago to represent the interests of Main Street securities firms 

active in the U.S. bond markets. The footprint of regional or nonWall Street securities firms in the municipal market is expanding. 

As a result of the financial crisis, a number of securities firms 

that previously were mainstays in the municipal market have shuttered, merged, or simply left the business. 

Other market participants as a result of deleveraging and continued financial stress, are less able to offer the market liquidity they 

once provided. 

During the height of the crisis last fall, many municipal bond 

issuers and investors came to depend on regional dealers for a subVerDate Nov 24 2008 13:08 Oct 19, 2009 Jkt 051596 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\51596.TXT TERRIE
41 

stantial amount of underwriting and secondary market liquidity so 

desperately needed at the time. 

We believe the role of the regional bond dealers in the municipal 

market will continue to expand, and we appreciate the opportunity 

to present our views. 

The RBDA supports all four bills the committee is considering to 

help municipal bond issuers and strengthen market regulation. 

Taken together, this legislation represents a reasonable, targeted, and transitioned response to problems bond issuers are facing as a result of the financial market crisis. 

In the interests of time, I am going to focus my remarks on two 

proposals: the Municipal Market Liquidity Enhancement Act; and 

the Municipal Advisors Regulation Act. 

The Municipal Market Liquidity Enhancement Act would primarily help two categories of municipal bond issuers: those who 

still have outstanding auction rate securities; and those who have 

variable rate demand notes. 

As the committee knows, from your examination of the auction 

rate market last fall, the large majority of periodic auctions that 

are that sole source of liquidity for auction rate securities investors 

continue to fail on a persistent basis. 

Investors are stuck holding securities they do not want and cannot sell, and issuers in many cases face extraordinarily high penalty rates on their borrowing. 

The buy-back settlement that some dealers have reached with 

enforcement agencies helped individual auction rate investors, but 

they really only transferred the illiquidity problem from investors 

to dealers. 

The real solution to the auction rate dislocation is to get the remaining auction rate securities restructured on a more permanent 

basis. The hurdle to doing that for many issuers is the inability to 

obtain bank liquidity facilities at a reasonable cost. 

Issuers of variable rate demand notes face similar constraints. 

Many VDRN issuers face extraordinarily high borrowing rates on 

their debt, not because of their own credit problems, but because 

of problems with their liquidity banks or bond insurers. 

The problem is often magnified for State and local governments, 

who issued VDRNs in combinations with interest rate swaps. 

The Municipal Market Liquidity Enhancement Act would address these issues by allowing the Federal Reserve to temporarily 

assume the role of a liquidity bank for VDRN issuers. State and 

localities with auction rate securities outstanding could use the Fed 

facility to convert those bonds into low-rate VDRNs. And VDRN 

issuers whose liquidity banks are causing them to pay in the inordinately high rates could use the facility to lower their borrowing 

costs. 

We are encouraged that members of this committee find value in 

the approach offered by this legislation. 

We strongly support the Municipal Advisors Regulation Act. As 

you know, there exists a major gap in municipal market regulation. 

Most importantly, unregulated financial advisors, swap advisors, 

brokers of guaranteed investment contracts, and other parties that 

play a vital role in advising States and localities on bond issuance 

and other activities currently fall completely outside of this jurisVerDate Nov 24 2008 13:08 Oct 19, 2009 Jkt 051596 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\51596.TXT TERRIE
42 

diction of the Securities and Exchange Commission and all other 

regulatory bodies, and as a result escape accountability for any 

misdeeds. 

These regulations relate to conflicts of interest, professional 

qualifications and standards, capital adequacy, fair dealing, books 

and records, and a variety of other areas. 

Financial advisors can serve a vital function in a bond deal, and 

their actions can have significant implications for issuers and investors. Indeed, there have been numerous examples in recent 

months of conflict of interest or poor advice from FAs that have 

negatively affected State and local bond issuers. 

Even honest and qualified FAs should be subject to accountability standards, which provide fair and measured approach to 

regulation that is consistent with scope and degree of regulation for 

other market participants. 

The Municipal Advisors Regulation Act would address the problem by giving the SEC regulatory and enforcement authority over 

municipal financial advisors. 

The bill would weed out rogue and unqualified FAs and would 

help ensure that the advice States and localities receive is sound 

and in the best interest of issuers. 

The RBDA also supports the other two bills that are a subject 

of this hearing, the Municipal Bond Insurance Enhancement Act, 

and the Municipal Bond Fairness Act. I would be happy to talk 

about these proposals during the question-and-answer session. 

Thank you again, Chairman Frank, Ranking Member Bachus, 

and other members of the committee for the opportunity to be here 

and for your initiatives to help improve the Municipal Securities 

Market. I look forward to your questions. 

[The prepared statement of Mr. Marz can be found on page 149 

of the appendix.] 

The CHAIRMAN. Thank you. 

And next we will have Ms. Laura Levenstein, who is the senior 

managing director at Moody’s. 

STATEMENT OF LAURA LEVENSTEIN, SENIOR MANAGING 

DIRECTOR, MOODY’S INVESTORS SERVICE 

Ms. LEVENSTEIN. Good afternoon. I am Laura Levenstein, senior 

managing director for the Global Public Project and Infrastructure 

Finance Group and Moody’s Investor Service. 

This is the group at Moody’s responsible for, among other things, 

assigning ratings to municipal bonds. On behalf of my colleagues, 

I want to thank the Commission for this opportunity to provide 

Moody’s views on proposals in the bill concerning rating agencies 

and municipal bond ratings. 

We understand that the bill, if adopted, would require every nationally recognized statistical rating organization to clearly define 

its rating symbols, apply them consistently for all types of bonds, 

and have its credit ratings address the risk that investors won’t receive payment in accordance with the bond’s terms of issuance. 

Broadly speaking, we understand that the bill seeks to promote 

ratings comparability between municipal and non-municipal bonds. 

Since Moody’s first began rating municipal bonds in 1918, we 

have sought the views of municipal market investors and issuers 

43 

on which attributes make our municipal bond ratings most useful 

to them. 

For many years, participants in the municipal market told us 

that they wanted our ratings to draw finer distinctions among municipal bonds than would be possible if global ratings were assigned 

to such bonds. 

This is because historically many municipal bonds have had 

lower credit risk when compared to Moody’s rated corporate or 

structured finance obligations. 

It was not until 2008 that a larger portion of the market indicated a desire for greater comparability between municipal and 

non-municipal ratings. 

Taking into account these views, in early September of 2008, 

Moody’s announced plans to recalibrate our long-term municipal 

bonds to our global ratings. 

In mid-September of 2008, events unrelated to our announcement triggered extraordinarily severe dislocation in the credit markets. Because of the turmoil that resulted from that dislocation, 

after talking with some market participants, we decided it would 

be prudent to suspend the recalibration process until the market 

stabilized. 

We were concerned that pursuing our plans during such turbulence could unintentionally lead to confusion or further market disruption. 

As credit markets have remained volatile in recent months, we 

have continued this suspension, but we look for an opportunity to 

implement the recalibration. 

We remain committed to implementing our plans. We continue 

our dialogue with market participants, and we are monitoring market conditions to find an appropriate time to proceed. 

The draft bill, therefore, mandates a rating approach that is consistent with the approach we plan to adopt in response to market 

feedback. 

I would have issues about the draft bill that Congress and/or the 

SEC may wish to consider. These include, among others, the risk 

that the bill would effectively freeze recently expressed market 

preference in legislation, thereby making it difficult for NRSROs to 

compete and develop their practices as the market evolves. 

I would also note that the draft bill represents the first substantive regulation of the content of credit opinions and rating 

methodologies. We have long believed that maintaining the independence and integrity of the content of ratings is critical to the 

effective functioning of our industry. 

We would hope that this bill does not open the door to compromising that independence. 

Moody’s is strongly committed to meeting the needs of investors, 

issuers, and other market participants with respect to municipal 

bond ratings. We welcome the opportunity to work with Congress 

and other policymakers to achieve these goals. 

Thank you. I am happy to respond to any questions you may 

have. 

[The prepared statement of Ms. Levenstein can be found on page 

137 of the appendix.] 

The CHAIRMAN. Thank you, Ms. Levenstein. 

44 

Next, Keith Curry, who is the managing director of the PFM 

Group. 

STATEMENT OF KEITH D. CURRY, MANAGING DIRECTOR, 

PUBLIC FINANCIAL MANAGEMENT INC. (PFM) 

Mr. CURRY. Thank you, Mr. Chairman, and members of the committee. 

My name is Keith Curry. I am a managing director of Public Financial Management, or the PFM Group, and past president of the 

National Association of Independent Public Finance Advisors. 

In addition, I bring the perspective of also being the mayor pro 

tem of the City of Newport Beach, California. 

For nearly 22 years, I had been a financial advisor to State and 

local governments throughout the Nation, advising on more than 

$14 billion in financings. 

Let me say on behalf of PFM, the largest independent financial 

advisory firm in the Nation, and on behalf of the members of 

NAIPFA, that we support your efforts to promote transparency and 

accountability in the financial advisory industry. 

We are proud to note that in the 34-year history of PFM, and in 

the 20-history of NAIPFA, our firm and NAIPFA members have 

never been associated with any of the scandals that have rocked 

the municipal market. Indeed, NAIPFA members have long ago 

adopted campaign contribution limitations to eliminate pay-to-play. 

We have established a test for professional competency, leading 

to the certification of practitioners as certified independent public 

finance advisors, and we have a strong code of ethics. 

We would offer the following comments for your consideration: 

PFM does not quarrel with the proposal to require municipal finance advisors to register with the SEC, although it’s appropriate 

to emphasize that there is no demonstrated need for registration 

and regulation to protect investors. As far as I know, nearly every 

publicized instance of abuse of investors or municipal issuers in the 

last decade has involved broker-dealer firms, which were already 

registered with the Commission. 

We believe that the committee draft bill has taken the correct approach in looking to the Commission to provide regulatory oversight of municipal financial advisory professionals. The SEC fully 

understands the debt offering process, and the roles which professionals play. 

We urge the Commission to resist the brokerage community’s 

predictable efforts to subject financial advisors to the rules of the 

Municipal Securities’ Rule-Making Board, or MSRB. The MSRB is 

a captive of the brokerage firms, who on day one compete with 

independent financial advisors for the role of advisor, and on the 

other days seek to obtain the highest rate of interest for their investor clients as the underwriters of municipal debt. 

It is the local governments and their taxpayers who are best 

served by preserving the strong voice of an independent advisor. 

We applaud the committee’s draft bill in focusing regulatory oversight on the maintenance of professional qualifications and fair 

practice standards for all financial advisors. This elevates the professionalism of the entire municipal finance community. 

45 

We also endorse SEC rules to avoid conflicts of interest and to 

eliminate improper influence of political contributions. 

Our firm individually and NAIPFA for the independent advisors 

as a whole, have urged these measures. 

Unfortunately, when NAIPFA went to the MSRP recently to seek 

strong rules against broker-dealers, taking both sides of municipal 

debt offerings—for example, serving as financial advisor and then 

flipping out to underwrite the same transaction—those proposals 

were rejected by the MSRB. 

PFM believes that the committee draft bill should be properly 

strengthened by extending a duty of care standard to all securities 

professionals serving as municipal financial advisors, not just those 

who would be newly regulated under this bill. 

By historical experience, the danger of abuse and dishonesty is 

presented by those who are already registered with the SEC as brokers. 

All those participants in the securities process who serve as financial advisors should be bound by the fiduciary principles of this 

bill, particularly those who are registered under Section 15 of the 

Exchange Act. 

It said of this proposed landmark legislation that it’s intended to 

level the playing field in municipal finance. That goal will fail if 

brokerage firms are excluded from the duties which are imposed on 

their competitors. 

Undoubtedly, special interest groups will be here to seek exemption for the banks, the financial advisors that operate in a limited 

territory, the firms that have a limited number of transactions, and 

others. 

We urge the committee to resist these pleas. The municipal finance world is made up of a universe of different players. But they 

should all have the same ethical requirements and the same professional duties. 

In summary, we support the efforts to ban pay-to-play, to provide 

for a standardized licensing and competency assessment process, to 

prohibit practitioners with prior records or fraudulent activity, and 

to ensure that a standard of professional care is established for the 

industry. 

We encourage the committee to pay special attention to the 

phase-in period, so as not to disrupt the municipal finance industry 

or to delay planned State and local financings. 

Be assured of our continued partnership to improve transparency 

and fair operations of the municipal securities market. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Curry can be found on page 89 

of the appendix.] 

The CHAIRMAN. Next, Mr. Alan Ispass, who is the vice president 

and global director of utility management solutions at CH2M Hill. 

STATEMENT OF ALAN B. ISPASS, PE, BCEE, VICE PRESIDENT 

AND GLOBAL DIRECTOR OF UTILITY MANAGEMENT SOLUTIONS PRACTICE, CH2M HILL 

Ms. ISPASS. Thank you, Mr. Chairman, and members of the committee. 

46 

I appreciate the opportunity to be here this afternoon on behalf 

of CH2M Hill, to present our thoughts on the municipal bond market. CH2M Hill is a global full service engineering, project development, and project delivery firm, with 26,000 employees worldwide. 

We are headquartered in Denver and have offices throughout the 

United States and throughout the world. 

A significant part of CH2M Hill’s core business is to help cities 

and counties plan, design, and construct major drinking water, 

wastewater, storm water, and transportation infrastructure 

projects. 

The practice that I lead includes a financial services team that 

helps municipal clients address funding and financing issues in the 

water sector. This work includes conducting cost of service and financial planning studies and also assisting clients to identify and 

secure funding for their capital improvement programs. 

We also serve in the role of consulting engineer, conducting independent analyses and certifications that are related to a client’s financial situation for inclusion in official offering statements for 

municipal bonds. These bonds fund projects, which provide essential services such as safe water for drinking and for fire suppression, wastewater collection and treatment to protect the public 

health and the environment, and stormwater control to mitigate 

impacts from flooding. 

These projects also return a significant amount of economic ben- efit to communities, estimated to be almost 9:1; for every $1 spent 

on stormwater projects, there is a $9 benefit, according to a report 

done by the U.S. Conference of Mayors last year. 

During the past year, however, we have observed firsthand that 

the global financial crisis has dramatically impacted our clients’ 

ability to effectively plan and finance their capital programs. 

Utilities have had significant declines in revenues due to foreclosures of residential properties and reductions in commercial and 

industrial water use. 

Many wastewater agencies are especially hard-hit, as they strive 

to meet Federal mandates to provide greater control of combined 

sewer overflows and sanitary sewer overflows. 

And of course, this is all occurring at a time when an estimated 

$600 billion of investment is needed in our Nation’s water and 

wastewater infrastructure to continue to protect the public health 

and the environment. 

These financial concerns have been exacerbated since the fall of 

2008. For years, utilities have been able to count on ready access 

to long-term municipal bonds to finance their capital improvement 

programs with interest rates often in the 4 to 5 percent range. 

However, accessibility to the bond market is now a problem for 

many utilities. Many of our clients have been informed by their financial advisors that utilities with credit ratings lower than double-A may not receive bids if they went to market, or the bids 

would be at a very high interest rate, very possibly causing 

unaffordable increases on their customers’ water and sewer bills. 

In the past 8 months, we have seen some clients that have previously had no problems issuing long-term debt, unable to issue 

bonds. Also, the downgrading of bond insurers has caused public 

utilities with less than a double-A bond rating to hold off on going 

47 

to market, delaying needed capital improvement projects and putting commitments for meeting projects and regulatory deadlines at 

risk. 

And even more troubling is the downgrading of bond insurers 

that has put some utilities in technical default of their current 

bond covenants for existing outstanding debt, because in some 

cases, these covenants require that utilities maintain bond insurance with a specified credit rating, or put significant funds into reserve. 

Such situations put a cloud over the ability of these utilities to 

issue additional debt for future needs. 

Without a doubt, the stimulus package provided some important 

financial assistance that is helping to fund some water and wastewater projects due to $6 billion that is being administered through 

the exiting State revolving fund programs, the SRFs. However, the $6 billion is only a small fraction of the country’s 

water and wastewater infrastructure needs. 

As an example for the substantial needs for funding, this year, 

the State of Arizona received 300 applications for water and wastewater projects, totalling more than $1 billion in project value. They 

only had $80 million in stimulus funds available to give for those 

projects. So based on a priority of applications, the State expects 

to be able to provide funding for only 51 of those 300 water and 

wastewater projects. 

Likewise, the State of Virginia received 240 applications for their $20 million in funds for drinking water projects. However, the 

State will only be fund 20 of the 240 projects. 

In light of the billions of dollars in need beyond funding available 

through the traditional SRF programs and funds made available 

through the stimulus, it is crucial that there be a robust municipal 

bond market that provides access to municipal borrowers at reasonable rates. 

Given the substantial financial challenges in the market today, 

the Proposed Municipal Bond Insurance Enhancement Act of 2009 

represents an important step forward. By providing up to $50 billion in reinsurance over the next 5 years, it provides a mechanism 

for allowing many municipal borrowers with less than top credit 

ratings to move forward with their capital programs. 

The specifics on eligibility and the cost of the risk-based premiums that will be detailed if the reinsurance program moves forward will be critical in determining how broadly the relief offered 

by this legislation will be felt throughout the municipal utilities 

sector. 

From our vantage point, however, as consultants to many water 

and wastewater utilities through the United States, the passage of 

the Municipal Bond Insurance Enhancement Act could be crucial 

to providing continued access to municipal bond market, and for 

providing sustainable infrastructure to protect public health and 

property and enhance the environment and encourage economic 

growth. 

Thank you. 

[The prepared statement of Mr. Ispass can be found on page 120 

of the appendix.] 

The CHAIRMAN. Thank you. 

48 

Next, Sean McCarthy, who is the president and chief operating 

officer of Financial Security Assurance, Inc. 

STATEMENT OF SEAN W. MCCARTHY, PRESIDENT AND CHIEF 

OPERATING OFFICER, FINANCIAL SECURITY ASSURANCE, INC. 

Mr. MCCARTHY. Thank you. Chairman Frank, Ranking Member 

Bachus, and members of the committee, my name is Sean McCarthy, and I am president and chief operating officer of Financial Security Assurance Holdings, better known as FSA. 

FSA provides financial guarantee insurance for municipal and 

global public finance obligations. We appreciate the opportunity to 

testify on the chairman’s legislation, which will provide reinsurance 

capacity for qualified municipal bond issuers and insurers, and establish a temporary liquidity facility for variable rate demand bond 

obligations. 

Such programs would provide much needed aid to the States and 

localities that depend on these sources of fundings, to provide municipal services and build infrastructure, which is a critical part of 

municipal finance role. 

It will also increase the capacity to the bond insurance industry 

and facilitate additional bond issuance. 

As you are well aware, the market for these State and local government bonds has been adversely impacted by the current credit 

crisis and lack of a unified regulatory authority. 

Additionally the market is currently underserved by primary 

bond insurers due to the downgrades or failures of five of the original seven primary bond insurers. Thus, currently there are two active providers: Ourselves, an assured guarantee, and one new company owned by Warren Buffett, which has participated selectively; 

and three other companies, which are working currently to enter 

the market. 

Further availability of reinsurance capacity has been significantly reduced over the past 2 years for the same reasons the primary guarantors were affected. 

Although economic conditions have stressed local government 

bond credits, the problems facing them are more centered on the 

lack of liquidity in the market. These credits are not troubled credits, and across the spectrum generally remain sound investments. 

A comparison of the large spread differences between municipal 

and wider-spread corporate and asset-backed bonds confirms municipals’ higher credit worthiness. 

Therefore, the illiquidity in today’s municipal market is largely 

the result of problems elsewhere in the debt capital markets. And 

this circumstance will not correct itself without Federal assistance. 

Just as liquidity is a key source of relief, Federal support of the 

bond insurance companies through the provision of credit capacity 

in the form of reinsurance is necessary for State and local government borrowers seeking to raise necessary capital to continue their 

operations. 

The creation of an Office of Public Finance in the Treasury Department to oversee the reinsurance program would help restore 

investor confidence in local government bonds and generally promote a return of liquidity to the market. 

49 

Additionally, it is an effective way to assist municipal bond insurers in obtaining the necessary capacity to satisfy market demand and encourage private sector investment, all the while maximizing the government investment without the direct use of taxpayer dollars. 

It is especially important to maintain private competition in the 

municipal bond insurance industry by allowing participation in 

such programs based on criteria that do not discriminate against 

companies that have continued to write the business and allowed 

participation for all bond insurers that are subject to State regulation. 

The mandatory divestment of reinsurance program after 5 years 

also presents the private industry from relying on permanent government assistance and will promote responsible behavior among 

municipal bond insurers. 

Treasury’s Federal reinsurance vehicle also would facilitate the 

diffusion of risk currently on the balance sheets of the bond insurers. We support the creation of such a vehicle and believe that the 

risk-based premiums under such a program should be based in 

part on sound underwriting standards, ensuring that insurers of 

various credit qualities can participate in this program in a manner that protects the interests of the America taxpayer. 

Such a program should be attractive to Congress and Treasury 

because it does not require a current outlay of Federal funds and 

would limit Federal reinsurance risk exposure in accordance with 

its criteria adopted for the insurance program. 

We believe that Treasury should look at the FDIC Deposit Insurance Program for guidance in creating such a program, whereby 

long-term costs are mutualized and charged back to the participants. 

Now returning to the issue of liquidity, we support the exercise 

of existing power of the Federal Reserve and Treasury under 

TARP, the Term Asset-Backed Securities Loan Facility, TALF, and 

other provisions of the Federal law, with the emphasis on: 

One, new issues of local government bonds, i.e., not financings or 

refundings; and two, restructuring of existing auction rate and 

variable rate government bonds. 

Specifically, we support the Municipal Liquidity Enhancement 

Act to provide a temporary liquidity facility for variable rate demand obligations, permitting the Federal Reserve to create a new 

liquidity facility that will ease the burden of interest costs on State 

and local securities. 

Most variable rate demand bonds— 

The CHAIRMAN. Mr. McCarthy, I’m going to have to ask you to 

wind it up. We are about to start running a minute over. 

Mr. MCCARTHY. Okay. 

The CHAIRMAN. If you can get to a conclusion fairly soon. 

Mr. MCCARTHY. Thank you for introducing this important legislation, which will provide much needed relief to State and local 

governments around the country. We appreciate the opportunity to 

appear before you this afternoon. I will be pleased to respond to 

any questions. 

[The prepared statement of Mr. McCarthy can be found on page 

159 of the appendix.] 

50 

The CHAIRMAN. Thank you. Next is Mr. Bernard Beal, the chief 

executive officer of M.R. Beal & Company, and he is testifying on 

behalf of the Securities Industry and Financial Markets Association. 

STATEMENT OF BERNARD BEAL, CHIEF EXECUTIVE OFFICER, 

M.R. BEAL & COMPANY, ON BEHALF OF THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA) 

Mr. BEAL. Thank you. Good afternoon. Chairman Frank, Ranking Member Bachus, and members of the committee, my name is 

Bernard Beal and I am the chief executive of M.R. Beal & Company and vice chair of the Securities Industry and Financial Markets Association, SIFMA. 

I am pleased to have the opportunity to testify before you today 

on behalf of SIFMA on these important pieces of legislation that 

address the critical issues for the municipal securities markets and 

its participants. We applaud your ongoing leadership and the bold 

steps that you are taking to stabilize this vital sector of the financial markets. 

While many sectors of the municipal market are regaining 

health, some areas have been unable to regain their footings and 

seek assistance in the capital markets. Many lower-rated State and 

local government issuers are facing a critical need for reliable liquidity facilities and long term credit enhancement, and the lack 

thereof is making it difficult for them to bring some transactions 

to market. The legislation that has been the subject of today’s hearings offers constructive solutions to the assistance that State and 

local issuers have in gaining access to the market and address important regulatory and rating matters that have in fact persisted 

for years. 

With regard to market access issues, we support these temporary 

measures and offer suggestions to ensure efficiency in restoring 

and spurring market activity with the least amount of direct Federal involvement. We also support the provisions regarding regulating unregulated financial advisors, which generally are consistent with the MSRB’s rules that govern regulated broker/dealer 

members who engage in the same financial activities today. 

I will address each of the proposed bills with a focus on the benefits that they provide to municipal market participants. First, the 

Municipal Advisory Regulatory Act. SIFMA supports the proposed 

legislation to regulate independent municipal financial advisors, 

who have not been subject to any regulatory oversight and have operated unfettered in the market for years. 

In early April of this year, an MSRB report found that 73 percent of the financial advisors that participated in at least one primary market transaction in 2008 were not subject to MSRB regulation. This legislation would fill the gap that has taken place in the 

regulation, and it would protect issuers and investors alike, and 

help restore confidence in the municipal security market. The legislation will also help to level the playing field for all market participants who offer financial advisory services, and we feel require currently unregulated financial advisors to be held to the same high 

standard which regulated broker/dealers currently adhere. 

51 

While we support this legislation, we caution against duplication 

in the regulatory regimes. Currently, the MSRB is the body that 

drafts the rules for the municipal securities market based on its 

deep understanding of the products and practices of the municipal 

securities dealers, and FINRA is responsible for enforcing those 

rules and regulation. SIFMA recommends that in defining the 

SEC’s role in regulating financial advisors, that the committee recognize the role of the MSRB and its regulatory framework, and 

consider the existence of the current responsibilities of regulators. 

In addition, while the fiduciary standard of care is defined under 

most State laws, the municipal finance market is a national one in 

which bankers, advisors, and trustees from all 50 States can work 

on transactions in all 50 States. Thus, a single standard of care 

under Federal law would regulate municipal financial advisors and 

at the same time establish a uniform standard which would apply 

throughout the country, regardless of the home jurisdiction of the 

advisor or the transaction. 

Second, the Municipal Bond Insurance Enforcement Act of 2009. 

SIFMA supports the proposal to establish a temporary Federal 

Government reinsurance program for transactions covered by primary credit market enhancement policy providers. This model provides the most benefits to the issuing community and to investors 

alike without direct Federal involvement in State and local desk 

issuance. This program will help some of the bond insurers currently in the market as well as any new entrants to it, because by 

reimbursing their losses, the program will increase the insurance 

capacity for those insurers. 

SIFMA endorses creating the Office of Public Finance within the 

Department of Treasury. This office will provide a point of contact 

for the municipal securities industry for non-regulatory matters, 

and it will help foster communication between State and local 

issuers with the Federal Government and provide municipal market stakeholders with an informational resource within the government. 

I will conclude my remarks by saying that we are in support of 

the other two legislations as well and I would be happy to take 

questions. Thank you. 

[The prepared statement of Mr. Beal can be found on page 80 of 

the appendix.] 

The CHAIRMAN. Thank you. Next, Mary Jo Ochson, who is the 

senior vice president—by the way, we are going to have votes in 

about 15 or 20 minutes, and that will end this. So Mr. Watt and 

I will ask, so you will be out of here in 20 minutes, is my guess, 

25 after we vote. We have 3 witnesses and 2 questions, 25 minutes. 

STATEMENT OF MARY JO OCHSON, CFA, CHIEF INVESTMENT 

OFFICER FOR THE MUNICIPAL BOND AND TAX-EXEMPT 

MONEY MARKET INVESTMENT GROUP, FEDERATED INVESTORS, INC. 

Ms. OCHSON. Good afternoon. Thank you, Chairman Frank, and 

members of the committee, for the opportunity to appear today. I 

commend your efforts to address the recent disruptions to municipal markets. 

52 

I am the chief investment officer for the municipal investment 

group at Federated Investors. I have been investing in municipal 

securities at Federated for over 27 years, and I am a former member of the Municipal Securities Rulemaking Board. Today, Federated manages $3.4 billion in municipal bond funds and $36.5 billion in tax-exempt money market funds. As investment advisor for 

our funds’ shareholders, Federated is vitally interested in the 

health of the municipal market. 

Before we get into our thoughts on the specific bills, let us consider some background on municipal money markets. The development of the municipal money markets has increased the amount 

and has reduced the cost of short-term financing available to State 

and local governments, hospitals, school districts, and other muni 

borrowers. Tax-exempt money market funds have been the driving 

force in this development. 

The variable rate demand obligation, or VRDO, is one of the 

most prominent security structures in the municipal money markets. Its structure as a floating rate security with the liquidity facility meets the needs of the money market funds and the low cost 

financing goals of issuers. Some VRDOs have become ineligible investments for money funds because of the deterioration and the 

credit quality of many banks and bond insurers. 

Interest costs on those VRDOs have increased, raising the cost 

of capital to muni issuers whose VRDOs now reside in the hands 

of their banks and are thus called bank bonds. In addition, new 

VRDO issuance has decreased as fewer banks are willing to provide the necessary liquidity facilities. Markets for municipal notes, 

however, have functioned comparatively better, although a limited 

number of issuers may face market access limitations. 

Moving on to the four proposals. It appears that the Market Liquidity Enhancement Act would create a helpful vehicle to preserve 

the liquidity and lower the costs of capital to issuers struggling 

with the bank bond problem or issuers who may not have market 

access to issue cash flow notes. The Act would provide a purchaser 

of last resource for such issuers. We agree with the approach of letting issuers of cash management notes first come to market. Then, 

if they are unable to sell their notes, invoking the support facility. 

More broadly, we applaud the many Federal efforts to support 

the credit quality and functioning of the banking system. Steps to 

support the banks directly support the functioning of the municipal 

money market, yet we encourage the committee and the Federal 

banking regulators to consider steps that would increase the availability and lower the cost of liquidity facilities to sound borrowers. 

Turning to the Municipal Bond Fairness Act, we do not oppose 

the shift towards one global scale, but we do have some suggestions. Credit ratings are meant to indicate the risk of default and 

recovery in the event of default, regardless of whether the bond is 

issued by the government or a corporation. We suggest that the 

concept of recovery in the event of default be specifically added to 

section 1A of the bill. 

Although we support the bill, we urge the committee and all the 

nationally recognized statistical rating organizations not to rest on 

an oversimplified approach to making municipal ratings more consistent with corporate ratings based solely on comparative default 

53 

statistics. Although muni defaults are rare, the default rate is not 

zero. During the Great Depression and the early 1970’s, muni defaults or the risk of defaults rose sharply. Lastly, qualitative forward looking factors such as variations in budgeting and unfunded 

pension and healthcare obligations have material effects on municipal credit quality. 

Moving on to the third piece of legislation, we support the objective of the Municipal Bond Insurance Enhancement Act to increase 

the capacity of insurers for bond insurance to the municipal bond 

market. 

And finally, regarding the Municipal Advisors Regulation Act, to 

the extent that this bill reduces situations where unsound advice 

may harm the creditworthiness of municipal issuers, we support 

the spirit of the proposed legislation. 

Thank you again Mr. Chairman. We are ready to help you as you 

strive to restore and maintain the vibrancy of this very important 

market. 

[The prepared statement of Ms. Ochson can be found on page 168 

of the appendix.] 

The CHAIRMAN. Next is Mike Allen, chief financial officer of Winona Health, on behalf of the Healthcare Financial Management 

Association. 

STATEMENT OF MICHAEL M. ALLEN, CHIEF FINANCIAL OFFICER, WINONA HEALTH, ON BEHALF OF THE HEALTHCARE 

FINANCIAL MANAGEMENT ASSOCIATION (HFMA) 

Mr. ALLEN. Thank you, Chairman Frank, and members of the 

committee. 

I am Mike Allen, chief financial officer of Winona Health, a 99- 

bed, community-owned, not-for-profit health system serving over 

50,000 residents in the State of Minnesota. I appreciate the opportunity to be here with you this morning representing the 

Healthcare Financial Management Association, or HFMA, in discussing the impact of recent municipal bond financing issues for 

not-for-profit hospitals. HFMA is a professional membership organization with more than 35,000 members working in a variety of 

healthcare settings. Our chief financial officers were heavily involved in developing the following comments. 

So why is access to capital crucial for not-for-profit hospitals? 

Providing care in a hospital setting has always been a capital-intensive endeavor. However, the need for affordable capital has 

never been greater due to three reasons. First, hospital facilities 

are rapidly aging. Over the past 2 decades, the average age of a 

hospital facility has increased by 25 percent. Second, there are constant advances in diagnostic and treatment technology that require 

hospitals to invest large amounts of capital in new equipment and 

ensure that patients have access to the most up to date care available. 

And third, hospitals are making considerable investments at reduced costs and pave the way for wider healthcare reform. This includes implementing fully integrated electronic health records to 

enhance patient safety and increase the efficiency of care provided. 

Few, if any, not-for-profit hospitals can fund their capital requirements solely through ongoing operations, and due to our tax-exVerDate Nov 24 2008 13:08 Oct 19, 2009 Jkt 051596 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 K:\DOCS\51596.TXT TERRIE
54 

empt status, we are prohibited from accessing equity markets. That 

is why it is critical that we have access to efficient debt markets. 

Access to an efficient tax-exempt bond market is very important 

to our industry, and by extension, to achieving the Nation’s 

healthcare goals. Current market conditions make it difficult for all 

hospitals to access the market, and for some, it is impossible. 

Today my hospital would have difficulty accessing credit markets 

at a reasonable rate. There are some signs of improvement, and the 

rates have stabilized, albeit at higher levels. 

Here are the HFMA recommendations. First, on liquidity facilities, based on the encouraging signs of our economy, at least in the 

beginning here, our members urge this committee to do no harm 

to that recovery. Liquidity facility solutions that are brought to the 

market should first and foremost be optional, and the preservation 

of a private market should be maintained. We also urge you to 

keep the scope of the liquidity facility narrow, and perhaps limit 

it to only existing bond issues. 

Second, on municipal bond reinsurance, our members believe a 

federally backed municipal bond reinsurance program would be 

beneficial to hospitals if it were simple and properly designed. The 

program should be short term and should be available for outstanding debt issues only. 

On credit enhancement, our members recommend that the underwriting processes, the collateral requirements, the covenants, 

and the usage constraints of the existing FHA 242 programs be reviewed to meet the current needs of the market. While the program 

has been in place for a number of years, providers have not 

accessed this credit enhancement option due to the extremely long 

underwriting and approval periods and the onerous collateral provisions. 

We also ask that the Federal Home Loan Bank Program that 

grants members permission to issue standby letters of credit for 

tax-exempt bonds be extended beyond its current December 31, 

2010, expiration date, and relax the requirement that participating 

banks post collateral equal to 100 percent of the letter of credit 

amount. We cannot overstate the impact that simplifications will 

have on hospitals, particularly small to mid-size facilities that are 

not integrated with a larger health system. 

Regarding financial advisors, our members would not recommend 

additional Federal regulation, but prefer to see a private sector solution, and if that does not work, then regulation to follow. Similarly, with rating agencies, our members would not recommend additional regulation and try to force an artificial consistency between 

healthcare and other industry credits. The healthcare business 

models are fairly unique in that their income statements are extremely dependent on the Federal and State legislative processes. 

Further, the industry is about to go through a period of sweeping 

healthcare reform; 85 percent of all the hospitals are not-for-profit. 

That is more than 4,000 by my count. These organizations play a 

key role in their communities, acting both as a healthcare safety 

net for the underprivileged and an economic engine for their communities. In addition to being a major employer in most communities by providing jobs with stable wages and benefits, the AmerVerDate Nov 24 2008 13:08 Oct 19, 2009 Jkt 051596 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\51596.TXT TERRIE
55 

ican Hospital Associations estimates that hospitals spent $304 billion on goods and services annually. 

In order for healthcare reform to be successful, the Nation’s notfor-profit hospitals need to be financially healthy. Facilitating access to stable and inexpensive sources of capital will reduce the 

cost of healthcare, ensuring access to hospital care for all patients. 

Further, without reliable funding, it will be difficult for providers 

to implement electronic health records and take the next steps 

needed to facilitate healthcare reform. 

Chairman Frank, I thank you on behalf of the HFMA’s 35,000, 

and to your colleagues for hearing this testimony, and wish you the 

best in making the appropriate decisions to support the healthcare 

needs of our communities across the Nation. Thank you. 

[The prepared statement of Mr. Allen can be found on page 65 

of the appendix.] 

The CHAIRMAN. Thank you. 

And finally, Mr. Sean Egan, who is managing director of EganJones Ratings. 

STATEMENT OF SEAN EGAN, CO-FOUNDER AND MANAGING 

DIRECTOR, EGAN-JONES RATINGS CO. 

Mr. EGAN. Thank you very much. 

Before I get to my written comments, I have just a few points. 

The charts that were presented earlier say it all. In the municipal 

area, the probability of default and the loss given default are much 

better in the typical muni area than the corporate area. The problem is under the current industry structure, issuer-paid rating 

firms are paid twice: once by the issuers; the second time by the 

monoline insurance companies. And therefore, the issuer-paid rating firms have an incentive for lower ratings. 

Furthermore, the proposed legislation cannot and will not change 

the fact that ratings are opinions, and I encourage you to look at 

section 2A on page 3 of the proposed legislation. It provides a massive loophole. 

You might ask why some independent rating firms do not enter 

the market in a larger way. Egan-Jones is considered to be the 

leading independent rating firm. We rate a number of muni 

issuers, but not as many as some of the issuer-paid rating firms. 

We rate some sovereigns, but for the most part it is difficult to support a widespread effort based on the investor-pay model. There is, 

however, a solution. Joe Grundfest, an ex-SEC Commissioner, suggested a BOCRA type system which would provide the support for 

other ratings. 

Now to my prepared comments. Egan-Jones is an NRSRO, but 

all the proposals under consideration at this hearing are directly 

related to the credit collapse, and the credit collapse is directly related to investors losing faith in the credibility of rating firms. In 

the municipal bond market, however, a large part of the current 

problem stems also from the financial deterioration of the municipal bond insurers, or monolines as they are sometimes called. 

The bond insurers’ problems arose because they went from enhancing relatively safe State and local obligations to complex assetbased credit instruments, which have been defaulting around the 

world for the last 2 years. From a credit quality perspective it has 

56 

always been the case that public securities have both a low probability of default and an extremely low level of anticipated loss, 

even in the event of a default. 

Nevertheless, it is accurate to point out, as the committee did in 

its statement of May 14, 2009, that municipal bonds with equal or 

lower default rates than corporate bonds have been given lower 

ratings by the major NRSROs. What has happened, unfortunately, 

is for years, State and local issuers have been told that they should 

purchase insurance which they really do not need. Ironically, these 

public entities now find themselves scrambling to maintain the 

marketability of their securities due to the financial weakness of 

the very companies which they thought to be enhancing those securities. 

Because of this shift away from their traditional and less risky 

business model, Egan-Jones issued a rating report in 2002 that 

MBIA, which is the largest of the monolines, did not merit the triple A rating which Moody’s, S&P, and Fitch accorded them. Our 

competitors kept ratings these companies rated at triple A until 

2008. 

Given the state of the monoline insurers, certainly Congress and 

the Administration should be working with the State insurance 

commissioners to develop Federal support programs. TALF, TARP, 

and numerous related government assistance programs are in place 

for commercial paper, inter-bank deposits, and a broad range of 

asset-backed securities. One can argue about the justification, cost, 

and even structure of these programs, but there is no compelling 

logic for saying that some forms of credit are eligible and others are 

less worthy. 

My personal opinion is that these governmental programs—and 

there is no doubt that they have helped to stabilize the situation— 

must be viewed as dealing with only the symptoms of the credit crisis rather than their cause. And their cause is well enunciated in 

the recent report on regulatory reform by the Congressional Oversight Panel, and is as follows: If companies issuing high-risk credit 

instruments had not been able to obtain triple A ratings from the 

private credit rating agencies, then pension funds, financial institutions, State and local municipalities, and others that relied on 

those ratings would not have been mislead into making dangerous 

investments. 

Thank you. 

[The prepared statement of Mr. Egan can be found on page 91 

of the appendix.] 

The CHAIRMAN. I do agree, when you talk about independence, 

that the investor pay is also an independence question. 

But beyond that, if you are worried about independence, you say 

in your introduction you were asked by investors and issuers to 

draw finer distinctions among municipal bonds which generally 

have had lower credit risk when compared to Moody’s rated corporate or structured financial obligations, but the result of that 

was the reverse. You say here that they had lower credit risk, but 

every chart we have seen says that it came out the other way, that 

they were rated as having more credit risk than the corporates. 

Can you reconcile that for me? 

57 

Ms. LEVENSTEIN. Yes I can. I think by finer distinctions, what we 

are referring to is a broader array of— 

The CHAIRMAN. No, I am not asking about the finer distinction 

part. You are saying that the motivation here was that municipal 

bonds generally have had lower credit risk when compared to 

Moody’s rated corporate or structured finance. I mean, are you acknowledging that in fact, municipals were rated lower than they 

should have been if they had been corporates? 

Ms. LEVENSTEIN. Municipals were rated on based— 

The CHAIRMAN. No, that is not the—I understand how you rate 

them. 

Ms. LEVENSTEIN. They are not comparable. 

The CHAIRMAN. You say here that they generally have—you are 

the one who compared them. You say you are not comparable. Then 

don’t compare things and then tell me they are not comparable. I 

am reading from your testimony: ‘‘Municipal bonds which generally 

have had lower credit risk when compared to Moody’s rated corporate or structured financial obligations.’’ Is that not an acknowledgement that they are rated lower than bonds that have a higher 

default risk? 

Ms. LEVENSTEIN. The municipal rating system is capturing different content. 

The CHAIRMAN. No, would you please answer my question? 

Ms. LEVENSTEIN. They are not measuring the same thing. 

The CHAIRMAN. Why did you say ‘‘compared to?’’ All right, I understand they are not, but the effect of it is—you said it. I am not 

putting words in your mouth. 

Ms. LEVENSTEIN. If one were to extract— 

The CHAIRMAN. Excuse me. I want you to tell me if I am reading 

something wrong: ‘‘Municipal bonds which generally have had 

lower credit risk when compared to Moody’s rated corporate or 

structured finance obligations.’’ No matter what the justification, 

no matter what your reasons are, am I correctly reading this that 

you are saying that municipals have less credit risk when you compare them to comparable rated bonds? You are the one who said 

that. Am I incorrect in this? 

Ms. LEVENSTEIN. No. No, you are not. 

The CHAIRMAN. Thank you. 

Ms. Ochson, you talked about one reason not to do just defaults 

was that there were greater defaults or threat of defaults in the 

1970’s. I don’t see those in the chart. I have the Moody’s chart, 

Moody’s rated municipal bond defaults. Actually, there were 10 in 

the not-for-profit healthcare, so I understand why healthcare may 

be a little nervous about this. On my chart here 1,300 of the 8,500 

issuers were healthcare, but they had more than half the defaults, 

10 out of 19. 

But I don’t see this. You said that municipals were defaulting or 

threat of default. Well, there is a big difference between a default 

and a threat of a default. Do you have a list of defaults in the early 

1970’s under municipals? I can’t find it. 

Ms. OCHSON. No, what I said is that there were many defaults 

in the Depression and there are— 

The CHAIRMAN. No ma’am, you said the 1970’s. Please. 

58 

Ms. OCHSON. And I said that there was increased default risk in 

the 1970’s. 

The CHAIRMAN. No, you said—I am going to check the record. I 

believe you said default or risk of default. But to make it clear, you 

are not saying there were defaults in the 1970’s, there were risks 

of default, but not default. 

Ms. OCHSON. There was heightened default risk in the 1970’s 

with— 

The CHAIRMAN. But not default. 

Ms. OCHSON. Yes. 

The CHAIRMAN. Okay. I believe that the record will show that 

you said that. Maybe I misheard, but I take the affirmation that 

there were no such defaults. 

The gentleman from North Carolina. We can move very quickly 

so members can go vote. 

Mr. WATT. Mr. Chairman, I think I will pass, except that I would 

like the gentleman on the far right to just tell me why the government would—in writing, not today—just tell me why the government would want to get into a reinsurance process that you testified, I thought, was not needed—the insurance was not needed in 

the first place. So if you can just give me some information on that 

in writing, I will pass. 

The CHAIRMAN. The gentleman from California. 

Mr. SHERMAN. I will have questions from the record— 

The CHAIRMAN. Or the gentleman from Missouri. If you have 

questions, ask them. If you don’t, don’t. 

Mr. SHERMAN. I just wanted to make the comment that I think 

it is important that we try to help 501(c)(3)s through the bill, and 

I think we do. 

The CHAIRMAN. Yes, they are. Now they are different then the 

general obligation, but— 

Mr. SHERMAN. I understand. 

The CHAIRMAN. Mutatis mutandis, as we say. 

The gentleman from Missouri. 

Mr. CLEAVER. I pass, Mr. Chairman. 

The CHAIRMAN. All right, the gentleman from Minnesota, quickly. 

Mr. ELLISON. Thank you Mr. Chairman. I will go quickly. I only 

have one question, and it is to whomever would grab it on the 

panel. 

Perhaps the largest contributor to the current crisis in the municipal bond market was the troubles of many in the bond insurance firms whose capital positions were severely undermined by 

losses in their structured finance book business. To prevent future 

problems of this sort, should we contemplate a sort of GlassSteagall for municipal bond business that would prevent these 

bond insurers from going off and providing insurance on exotic securities when the municipal policyholders are left holding the bag 

if these bets fail? Mr. McCarthy? 

Mr. MCCARTHY. I should probably have a stab at that. I think 

it is a good question. Two things to note. The contemplated legislation here would consider that participation in the reinsurance program would be for companies that on a look forward basis were 

only writing municipal bond insurance. 

59 

The CHAIRMAN. That is correct. That was a condition. 

Mr. MCCARTHY. So number one, that would make sure that the 

risks that were endemic in asset-backed securities were not there, 

being shared with municipalities. 

Second, if you look at the municipal—the problem with some of 

the—most of the municipal guarantors that got in trouble was really in the concentrated risk that they took with CDOs of ABS, so 

that they were really wrapping transactions that lost 90 cents on 

the dollar or will lose 90 cents on the dollar. Ourselves and others, 

Warren Buffett, and several other new entrants that are contemplating entering the space are really focused on putting credit enhancement in place for municipalities. 

The CHAIRMAN. That will have to end it. 

I thank the panel. We would appreciate if any of you want to 

supplement anything or respond to any comments that were made, 

so the record will remain open for 30 days. I appreciate it, and I 

am sorry for the truncation, but it was very useful for us. 

[Whereupon, at 1:36 p.m., the hearing was adjourned.] 

(61) 

A P P E N D I X 

May 21, 2009 

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