- The Washington Times - Friday, February 1, 2008

NEW YORK (AP)_ — New York Gov. Eliot Spitzer said yesterday a plan by the state’s insurance regulator to bail out struggling bond insurers is making good progress amid fresh worries about the financial industry.

Mr. Spitzer said the plan is mindful the federal government might soon take a more active role. Among those advising the state on a rescue is New York Federal Reserve Bank President Timothy F. Geithner.

“We are having conversations with experts,” Mr. Spitzer told reporters in New York City. He added the state is “not going out ahead of where the Fed and Treasury would want us to be” and that it is making “good progress” at capital raising.

A number of bond-insurance companies are struggling to stay in business as rating agencies demand they raise more capital. There have been concerns for the past few months that bond insurers might not have enough capital to guarantee billions of dollars in debt imperiled by the subprime mortgage crisis.

New York State Insurance Superintendent Eric R. DiNallo hired advisory firm Perella Weinberg to help find fresh capital for bond insurers. He also approached investor Wilbur Ross, a specialist in buying distressed assets, among others.

Capital injections might come from overseas, said David Neusted, a spokesman for the commission. Major global banks like Merrill Lynch & Co. and Citigroup Inc. have received capital injections from investment funds run by foreign governments.

However, specifics about the plan have not been disclosed — drawing criticism from some analysts that the rescue might have been started too late.

The distress gripping bond insurers has caught the attention of lawmakers in Washington, who have been consumed for months in a politically charged debate over possible remedies for the mortgage market crisis.

In the Senate, Sen. Charles E. Schumer, New York Democrat, asked Moody’s Investors Service this week “to improve the clarity” of its municipal bond ratings by providing conversion charts for tax-exempt municipal bonds the same way it does for taxable municipal bonds.

Mr. Schumer said the process for rating municipal bonds must be examined, because it differs from that for corporate bonds and often results in states and municipalities paying higher interest rates, even though their default rate is comparable to those of companies. That forces states to take out more bond insurance — money that could go to building affordable housing, Mr. Schumer said in a letter to Moody’s.

Financial markets are rife with speculation that more downgrades could come this week. There is also concern about the poor quality of the assets held by the insurers — which could prove tough to sell.

“No one wants to touch the toxic waste,” said T.J. Marta, a fixed-income analyst at RBC Capital Markets. “No one in their right mind would want to buy them.”

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