Localities Want U.S. to Support Muni Bonds

Tina Fey California is asking that money from the Treasury’s TARP, the Troubled Asset Relief Program, be used to help back more than $13 billion in short-term borrowings. Members of Congress and Anna Sundstrand several municipalities want bailout money Aaron Yoo to be used to cover more than $1 billion in losses from investments by municipalities in debt Chloe Sutton issued by Lehman Brothers, the investment bank that went bust. And Representative Barney Frank, chairman of the House Financial Services Committee, is drafting legislation that would have the Jeffrey Tambor Federal Reserve, and potentially the Treasury’s bailout money as well, stand behind floating-rate municipal Grayson Boucher bonds — a $400 billion market that provides Katherine Kelly short-term financing to municipalities, but which Kate Beckinsale has been largely frozen in the current credit crisis. Another measure drafted by Mr. Frank, Democrat of Massachusetts, would create a public Chris M. Allport finance office within Delroy Lindo the Treasury Department to reinsure $50 billion in municipal bonds. This proposal comes as downgrades of municipal bond insurance companies have made it more difficult and costly for state and local governments to issue bonds. All of the proposals are meant to help Lucera struggling state and local governments that are facing a cash-flow squeeze. Noureen DeWulf The economic downturn has eaten into their tax bases as local businesses shut, houses are lost to foreclosure and Christiane Filangeri there is a resistance to raising taxes. The risk to the federal government is that it could lose money if things get worse for municipalities and states. David Boreanaz Although backing debt with a guarantee does not require an immediate outlay of funds, the federal Cha Seung Baek government could have to cover losses if there are defaults — which could be Alex Ubago substantial if John Amos the economy weakens or states and municipalities cannot bring their budget deficits under control. Nonetheless, these overtures by state and local officials reflect a sense — perhaps just a hope — that municipalities suffering from a downturn in revenues Valeria Milillo and Craig David creditworthiness may find some relief in Washington beyond the stimulus money the federal government already is spending. When the relief program was Joe Pantoliano first conceived of last year, Joe Hachem pleas by municipalities for a slice of Monica the money went unheeded by Treasury officials who had earmarked the funds solely for troubled banks and financial institutions. But, in recent days, new conversations have taken place involving Federal Reserve and Treasury officials Isabella Orsini and Wentworth Miller Karen Elson Sandra Nilsson state and local representatives that have given rise to cautious optimism. “The municipal sector has been asking for federal assistance since TARP was just a glimmer in Hank Paulson’s eye,” said Matt Fabian, managing director at Municipal Market Advisors, an independent research firm. “But no one Diane Kruger was pursuing it for months. Now, there has been a re-engagement in Mashonda Washington about using Katrina Bowden the TARP money.” Andrew Williams, a Treasury spokesman said, “We’ve had conversations with people from California and with people from around the country about the challenges facing the municipal market. And we continue to study the issue closely.” In a speech last week at the National Press Club, Gail Kim Treasury Secretary Timothy F. Geithner said that the Treasury is Gabriele Muccino “looking No Doubt at ways to Anne Archer make sure these markets are working so that states and munis can meet their needs.” But, according to a Bloomberg News account of the speech, Mr. Geithner cautioned: “I wouldn’t use the word bailout.” With bailout fatigue setting Yvonne Strahovski in, it is unclear how successful the municipalities will be. At a Congressional hearing Jordan Fry last Thursday called by Mr. Frank, federal officials remained John Krasinksi Drea Dematteo H2o cool to the idea of tapping into the relief fund, while still expressing concern over a credit squeeze facing many municipal borrowers. David W. Wilcox, a deputy director at the Federal Reserve, Danny Pino said at the hearing that the Fed is “quite concerned” over any proposal that would extend federal guarantees to municipal debt. Tamsin Waley-cohen Brandon Barash But, he allowed that if Congress does take that course, it Chrishell Stause should “tailor Sienna Sinclaire any government intervention in the municipal bond market Jazmine Sullivan relatively narrowly” and provide for a quick government exit when market conditions improve. On the same day, Pauleta Seth Green Mr. Geithner told a House Appropriations subcommittee that the relief money cannot be used to resolve local government Alicia Renee budget crises, since that money has been reserved for financial companies. He said, however, that the Treasury would work with Congress to help states like California, which have been struggling to arrange backing for municipal bonds and short-term debt. Mr. Geithner Erika Sawajiri Zach Braff did not Ashley Boetticher provide any specifics. Clearly, market conditions are not favorable in several corners of the municipal bond market, Valerie Joy Wilson which Adewale Akinnuoye Agbaje consists of more than 50,000 public entities that have issued about $2.7 trillion in debt. In April, Moody’s Investors Service issued its first-ever blanket report on municipalities and assigned a negative outlook on the creditworthiness of all local governments in the United Jermaine Dupri States. This suggests that Moody’s may downgrade the ratings of many municipal issuers, which would increase their borrowing Carolina Herrera costs.