Risk Prof Martin Grace suggested on Monday that TRIA support is a blue state issue, particularly for urban centers like New York City, explaining the outcries of NY senators in reaction to the Treasury Department recommendations against renewing TRIA in its present form. He suggests an objective analysis of the economics, including the external costs and benefits of subsidizing construction projects in NYC. RiskProf : TRIA--A Blue State Problem?
One of the considerations to keep in mind is the reaction of those that fund construction in NYC. According to the Congressional Budget Office, Federal Terrorism Reinsurance: An Update (January 2005) [hereinafter “CBO Terrorism Study”], following 9/11, banks did not tighten commercial lending requirements, even though the market for terror coverage dried up. Builders and developers were able to distribute risk through the use of REITs and mortgage-backed securities, plus requiring more developer equity in properties. All without terror insurance. Banks still loaned money on construction, according to the CBO study, which found no significant impact on construction hiring or construction loans. True, properties and securities that did not take such financial diversification measures suffered credit rating downgrades because of the lack of terror coverage.
If that is the case, the source of New York's concerns may be from small and medium sized businesses and construction interests who may not have access to the more sophisticated financial tools like mortgage-backed securities and REIT investment.
Should we continue the present approach, in which federal reinsurance is free? Expecting private reinsurance (from which the capacity for terror catastrophe coverage must come) to compete with a free federal product seems just silly to me. As long as the feds give away reinsurance, small and medium sized businesses will be dependent on the kindness of strangers in Washington. And those strangers will be dependent on their votes and campaign contributions.
Posted by dougsimpson at July 12, 2005 11:03 AM