Investors holding municipal bonds directly or through mutual funds could see their returns diminished by ratings agencies' recent downgrades of troubled bond insurers, according to a report prepared for Congress.
"For someone intending to sell the municipal bonds before maturity, the downgrade cuts the value of the bond," the Congressional Research Service report, sent to lawmakers on Monday, says. "How much of a loss in value would depend on how low the insurer was downgraded and the rating on the underlying bond."
Some lawmakers already are concerned and a House subcommittee has a hearing scheduled for Thursday on the state of the bond insurance industry.
"The written responses of financial regulators to recent inquiries I made about the problems affecting the bond insurance industry and the shortcomings of its current regulatory regime have convinced me of the real need to reform the oversight of this important sector of our financial system," Rep. Paul E. Kanjorski, D-Pa., chairman of the subcommittee on capital markets, insurance, and government sponsored enterprises, said
The Congressional Research Service report said that with the potential losses so high, financial institutions would be acting in their own "self-interest" to help the insurers "retain their AAA ratings with or without direct government intervention."
"Unless a single, very well capitalized individual or firm becomes convinced that buying out a large bond insurer made business sense, the odds of a purely private rescue seem small," according to the report.