Muni bonds rating bill clears panel

Legislation that would subject municipal bonds to the same ratings standards as those issued by corporations cleared a key House committee on Wednesday.

The bill sponsored by Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, follows recent distress in the bond insurance industry, which raised the cost of financing public works projects, hospitals and schools. The committee approved it on a voice vote, sending it to the full House.

Federal lawmakers and state officials contend that local governments and their taxpayers have been unfairly penalized by high-risk ratings on their municipal bonds.

They maintain that the three big Wall Street rating agencies -- Standard & Poor's, Moody's Investors Service and Fitch Ratings -- have cost taxpayers billions in added interest and bond insurance charges by holding municipalities to more stringent rating standards than bonds issued by corporations. Municipalities have around $2.6 trillion in outstanding debt.

If the same rating scale were used for both municipal and corporate bond markets, most municipal bonds would have a high enough credit rating that insurance wouldn't be needed, the critics say.

In March, Moody's said it planned to change its rating procedures to use the same evaluation system for municipal and corporate bonds. The new legislation would make that a legal requirement for all rating agencies.