The US' Securities Industry and Financial Markets Association (SWIFMA) is pressing Washington to provide letters of credit (L/Cs) or standby bond purchase agreements to shore up the troubled municipal and auction-rate bond markets.

Two identical letters have been sent by SWIFMA to the House Financial Services Committee chairman, Barney Frank, and Senate Banking Committee chairman Christopher Dodd asking for federal interventions to boost confidence in the municipal bond market.

Standby L/Cs

One intervention SWIFMA is asking the Obama administration to consider would involve the development of a federal liquidity facility to write standby L/Cs for auction-rate preferred shares (ARPS).

Typically, ARPS are shares issued by a closed-end fund that uses the proceeds to buy triple-A-rated securities such as municipal bonds.

No safe bet

At one time ARPS were considered a very safe bet by investors. They were a liquid, safe, slightly higher-yielding, tax-exempt alternative to money market funds.

This was until last year when municipal issuers began paying exorbitant rates because auctions of municipal bonds failed to attract buyers.

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