Treasury optimistic on Bond Insurance

The U.S. Treasury Department is optimistic that problems in bond insurance will be worked out and progress is being made, a senior Treasury official said on Thursday.

Treasury Undersecretary for Domestic Finance Robert Steel said that he was encouraged that various groups with an interest in the bond insurance market -- from the New York state insurance regulator to the insurers -- are communicating.

"It's a good long list of people who are adjacent to this issue. The good news is that it seems all of those people are speaking," he said. "There are lots of incentives for people to figure this out, and it seems to my mind, progress is being made and ideas are being shared."

"Assuming that these are going to be ongoing entities, then they'll need to have fresh capital," he said.

Having insurance companies increase their capital has been suggested as one solution to the problems triggered when ratings agencies lowered or threatened to lower the major bond insurers' "AAA" ratings.

Another option presented by New York Insurance Superintendent Eric Dinallo has been to create a "good bank-bad bank plan" that would split the companies' healthier municipal bond insurance from its more troubled enterprise of backing mortgage debt.