California may create bond insurer, rival Buffett : US Business

By Anastasija Johnson

NEW YORK (Reuters) - California Treasurer Bill Lockyer is exploring the possibility of having state pension funds create a new bond insurer, his spokesman said on Thursday.

Lockyer has no immediate plans to use Berkshire Hathaway's new bond insurance unit following congressional testimony earlier this month by Ajit Jain, the head of the Berkshire unit, said Tom Dresslar, the spokesman for the California treasurer.

In his testimony, Jain defended using different ratings for municipal and corporate issuers that created the need for bond insurance, Dresslar said.

Lockyer is trying to change this double-rating system because it drives up borrowing costs for states and local governments. He also wants state pension funds to pressure Standard & Poor's to modify how it rates municipal bonds.

Berkshire, controlled by billionaire investor Warren Buffett, entered the municipal bond insurance sector this year after a request from the New York insurance superintendent following the collapse of investor confidence in the existing insurers.

Buffett saw the new insurance venture as an attractive opportunity, but he might not win much business from California.

"The treasurer's view is -- unless we get a word from Mr. Buffett that he doesn't share the view expressed in Mr. Jain's (testimony) we won't have any interest in doing business with Mr. Buffett's insurance company," Dresslar said.

Spokesmen for Berkshire Hathaway, Standard & Poor's and California's insurance department could not be immediately reached for comment.

CRITIC OF S&P MUNI RATINGS

Lockyer also wants state pension funds to pressure Standard & Poor's to change its municipal rating policy to equalize state and government debt ratings with corporate ratings.

Credit agencies have historically used a different rating scale for the $2.6 trillion municipal bond market to allow investors to better compare the relative riskiness of tens of thousands tax-exempt bond issuers.

But this practice often resulted in municipal bonds getting lower ratings than corporate bonds with equivalent default risk, raising borrowing costs for state and local governments.

Standard & Poor's stands behind its present rating system. The agency said last week that municipal investors widely understand its method and that municipal bonds are already rated higher than corporate bonds, with 99 percent of all munis considered investment grade.

Moody's Investors Service and Fitch Ratings have taken steps to address issuers' concerns and are weighing whether to harmonize their muni and corporate rating systems.

Dresslar said Lockyer has had preliminary discussions about the new bond insurer with the $235 billion California Employees' Retirement System, or Calpers, which is the biggest U.S. pension fund. The treasurer will also pursue this proposal with the California State Teachers' Retirement System, or Calsters.

Lockyer is a board member of Calpers, which has 1.8 million shares of Standard & Poor's owner McGraw-Hill , Dresslar said. The California treasurer also is a board member of Calsters, but Dresslar did not know how many McGraw-Hill shares it owns.

About half of all municipal bonds are insured but U.S. states, cities and towns increasingly are skipping this protection because investors now shun their debt unless it is backed by the very few insurers who did not imperil their top-notch ratings with profit-eating subprime plays.

Since tax-free bonds have such a low default rate of less than 1 percent, insuring this type of debt can be both exceptionally profitable and low risk, credit agencies say.

(Additional reporting by Joan Gralla)

(Reporting by Anastasija Johnson; Editing by Jan Paschal)

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