Some people never learn. Representative Barney Frank of Massachusetts is one of them.

One might hope that Frank would have learned something from the Fannie Mae and AIG debacles. Sadly that hope is misguided. Barney Frank now wants the government to enter the municipal bond business.

Please consider Cities Ask Treasury for $5 Billion to Fund Public Bond Insurer.

The National League of Cities says it will ask the U.S. Treasury today for a $5 billion interest-free loan to capitalize a new municipal bond insurer it plans to create.

The Issuers Mutual Bond Assurance Co. would be the first publicly owned U.S. financial guarantor. The $5 billion capitalization would make it the biggest in the industry, eclipsing MBIA Inc.’s capital base of $3.8 billion and the $1.1 billion of current market leader Assured Guaranty Inc.

The company will apply to the Treasury for a ruling that its income be tax-exempt, said Cathy Spain, director of the League of Cities’ Center for Member Programs.

“Fifteen shareholder-owned municipal bond insurers have failed because of the intense pressure to produce 15 percent to 25 percent annual returns for their shareholders,” according to a copy of the preliminary business plan the League submitted to Treasury.

In response to the collapse of the bond insurers, a number of would-be replacements said they would enter the field. Rep. Barney Frank of Massachusetts, the Democratic chairman of the House Financial Services Committee, said in February that the federal government should enter the business.

IMBAC, as the new insurer would be known, is asking Treasury for $3 billion in cash upfront. It said it would seek to insure only general obligation and essential-purpose revenue bonds. In its cash-flow projections, the firm said it would charge premiums equal to about 70 basis points on a 25-year bond.

IMBAC said it would insure $20 billion in bonds during its first year in operation, $40.8 billion in the second year and $108 billion by the fifth year. The firm’s plan estimates that the business would require a staff of at least 30.

Pure Insanity

The IMBAC proposal is pure insanity. The government has proven it no idea how to price risk, and even if it did, government ought not be competing with private enterprise. Fannie Mae (FNM) and Freddie Mac (FRE) are proof enough.

Warren Buffett previously expressed an interest in this area, even agreeing to reinsure debt of Ambac (ABK) and MBIA (MBI). If municipal bond insurance makes any sense at all, then let Berkshire Hathaway (BRK) sort it out.

Mike “Mish” Shedlock
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