[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]





                    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










                  U.S. GOVERNMENT PRINTING OFFICE
51-596 PDF                WASHINGTON : 2009
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001






                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
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

        Jeanne M. Roslanowick, Staff Director and Chief Counsel











                            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

              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

 
                    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 non-profit 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 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 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 believe 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 
6\1/2\ minutes, so the gentleman has 8\1/2\ minutes to 
allocate. I have 9\1/2\ 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 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 
short-term 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.
    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 
2\1/2\ 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 co-sponsor 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 Hartsfield-Jackson 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 
1\1/2\ 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 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.
    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 endanger 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 Commission 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.]
    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 low- 
and 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 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.
    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 re-marketed 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 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.
    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 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 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 liquidity 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 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 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.
    [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 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 2\1/2\ 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 regulating 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?
    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-in-100-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 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 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 long-term 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 frequent 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.
    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 
ignore $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 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.
    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.
    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 contribution 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.
    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.
    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, 
``One-in-Five Chances for this Car to Explode.'' Do you agree?
    Ms. Haines. I hope so.
    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--
    Mr. Leppert. And that drives everything--corporate, 
everything else--
    Mr. Manzullo. Well, they probably thought the same on 
triple-A 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.
    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.
    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.
    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 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 non-Wall 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 substantial 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 jurisdiction 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 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.
    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.
    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.
    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 
benefit 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 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.
    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.
    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.]
    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.
    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.
    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 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-exempt 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 American Hospital Associations 
estimates that hospitals spent $304 billion on goods and 
services annually.
    In order for healthcare reform to be successful, the 
Nation's not-for-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 
Egan-Jones 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 asset-based credit instruments, which have been 
defaulting around the world for the last 2 years. From a credit 
quality perspective it has 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?
    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.
    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 Glass-Steagall 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.
    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.]





                            A P P E N D I X



                              May 21, 2009


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]





