New regulations governing bond insurers that the New YorkInsurance Department is drafting will mandate greater transparencyinto the risks the sector is guaranteeing, New York InsuranceSuperintendent Eric Dinallo told Congress today.

For example, Mr. Dinallo said state regulators are consideringwhether bond insurers should be prohibited from instruments calledcollateralized debt obligation.

Superintendent Dinallo's comments were made at a hearingconvened by the House Financial Services Committee to look into thevolatility and soaring interest costs currently affecting themunicipal bond market.

Anticipating calls by members of Congress for dual, federalregulation of the industry, Mr. Dinallo defended state oversight ofthe bond insurance industry.

"It is important to understand that even restoring someconfidence in the bond insurers' credit ratings is not likely toresolve all the current problems," Mr. Dinallo said.

Rep. Spencer Bachus, R-Ala., ranking minority member of thecommittee, said in an opening statement at the proceedings thatbipartisan support is growing on the committee for a disclosureproposal outlined last year by Securities and Exchange CommissionChairman Chris Cox.

That proposal would require meaningful public disclosures "thatare current and understandable, with a full accounting of allmaterial information at the time of a new municipal bond issuance,"Rep. Bachus said.

Rep. Bachus said that Rep. Barney Frank, D-Mass., chairman ofthe panel, "has agreed to invite Chairman Cox to appear before thecommittee later this year to formally consider his proposal."

His comment added substance to Rep. Frank's opening statement,in which he said municipalities are having to pay extremely highprices to float tax-exempt debt--a problem he said was caused by"grievous misjudgments by the private sector" in securitizing riskydebt, much of it backed by subprime loans to borrowers who aredefaulting.

"I am going to say to the rating agencies and to the insurers[that] they have about a month to fix this,'' Rep. Frank said incomments before the meeting.

He also said that because of the low default rate on municipalsecurities compared with private-sector debt, it may be unnecessaryfor municipal issuers to get bond insurance on their debt.

California Treasurer Bill Lockyer criticized rating agencies forthe way they deal with municipal debt. Responding to Rep. Frank'snotion that municipal bonds might not need coverage, he cautionedthat insurance might be necessary because municipalities inoffering documents for debt many times understate their financialcondition and their obligations--for example, pensionliabilities.

He also cited the case of Orange County, Calif., which becameinsolvent while seeking to keep taxes low and services high bypurchasing risky derivatives.

When the derivatives turned sour, the county found itself facinghuge obligations.

Mr. Lockyer's comments effectively supported Mr. Dinallo, bysaying the answer to the crisis is greater transparency in offeringstatements for municipal debt.

Mr. Lockyer called the bond rating system for municipalsecurities "fundamentally flawed" because they hold municipalissuers to a higher standard than corporate issuers.

Mr. Dinallo in describing the rules the department is drafting,said, "There is nothing inherently wrong with securitization."

"Properly used, it can be a valuable tool for raising capitaland spreading and therefore reducing risk," he added. "But we mustunderstand the risk of moral hazard and other agency problems whenthere are large-scale transfers of risk."

Clearly, he said, "there must be a way to ensure that the risksthat are securitized are accurately reported through each stage ofthe process so that underwriters, credit rating agencies, bondinsurers and investors all understand the actual risk and makedecisions on that basis."