The municipal bond market, which Securities and Exchange Commission Chairman Richard Breeden last week told Congress was basically healthy, is on track for another record year. And although it has operated "for a long time," in Mr. Breeden's words, it can still use some reforms.
I say we're looking at another record year, surpassing the $204 billion done in 1985, and this time, not fueled by speculation about tax reform but in response to lower rates and the sale of bonds already authorized for various projects but not yet sold. This prediction made, on to the reforms.
* Make requests for proposals, requests for qualifications, and the like, public.
I thought it was a pretty good idea some months back to start a "requests for proposals" calendar in The Bond Buyer, as one banker suggested. "That," he told me, "that's the real forward calendar of deals."
Like all good ideas, it faced some real resistance: not just from the bankers who wanted to keep RFPs and RFQs to themselves, but from issuers who wanted to do likewise, who only wanted to send their requests to three or four underwriters.
More than once, bankers have defended the process of negotiating bond issues with, "It's now a very competitive process, getting negotiated business." And so it may be, with the extensive presentations they must give to issuers.
I can understand the perfectly sane and sound reason why bankers would not want to share information on who is soliciting what: profits. But why the resistance on the part of issuers to making requests public? Innocence and profound idealism prohibit me from guessing.
* Do away with the good-faith deposit check requirement.
I brought this one up in early March. In 1897, I was surprised to learn, The Daily Bond Buyer editorialized against the practice of requiring bidders to post checks of, usually, 2% of the face value of a bond issue.
The requirement was put into effect to guard against "postage-stamp bidders" and other such nefarious souls who bid on deals and, if the market turned on them, simply disappeared.
The solution, as put forth by our founder, William F.G. Shanks, was to require a deposit only if the bidder was not known to the issuer. This made good sense then, and it makes good sense now.
I suppose the Public Securities Association and the Government Finance Officers Association are working on the problem. But, guys, it's been almost a century since Mr. Shanks pronounced it "archaic." And, as he wrote in 1897, the problem "seems quite as far as ever from practical solution."
Incidentally, in response to that March column, George V. Calvert, a vice president at Central Fidelity Bank in Virginia, suggested a whole raft of reforms to anachronistic bidding practices, such as requiring par bids, the use of net interest cost for determining best bid, requiring underwriters to pay issuance expenses, and "couponing instructions that create the opportunity for non-ascending interest rates when the yield curve has a positive slope."
The letter appeared on April 8, and I commend it to the powers that be.
* Establish a central location where competitive bids could be opened electronically.
Is there any good, economical reason why bids on competitive deals should be opened at city hall at 11:00 a.m., eastern standard times? Is there any reason why out of town banks must be required to hire a local banker as part of their underwriting team, in order to deliver the bid -- or for successful bids to arrive late because of traffic, trains, and other such daily nuisances?
The answer is certainly in the negative. Make the process more streamlined and efficient, and it is axiomatic that you will get better bids. True, issuers will lose, as one banker told me, a measure of local autonomy. And their local laws will have to be amended to allow participation in such an operation. But surely these are not insurmountable difficulties.
* Adopt the Florida rules.
Gov. Lawton Chiles made waves last year when he urged state agencies to get out of the business of holding up underwriters, bond counsel, and financial advisers for political contributions in exchange for business and to specify precisely why negotiated, rather than competitive, bidding should be used.
The GFOA already urges the use of competitive bidding. Why not also get to the heart of the matter, and take money out of the equation?
* Petition the Supreme Court to overturn their decision in South Carolina v. Baker.
The Supreme Court in April 1988 decided the 1982 South Carolina vs. Baker case challenging the mandatory registration of the owners of tax-exempt bonds.
The court found that registration was constitutional, then it went a step further, throwing out the 1895 Pollock v. Farmers' Loan & Trust Co. case, which gave birth to the doctrine of reciprocal immunity, the legal theory that the federal government cannot tax the debt of state and local governments and vice versa.
The court's decision was 7 to 1, with Justice Sandra Day O'Connor dissenting. She wrote in her dissent, "If Congress may tax the interest paid on state and local bonds, it may strike at the very heart of state and local governmental activities."
South Carolina v. Baker is not sacred. Not three weeks ago, The Wall Street Journal carrieda story listing the 260 precedents that the Supreme Court has reversed. L. Gordon Crovitz, their "Rule of Law" columnist, noted, "the only binding constitutional precedents are rulings that are indeed constitutional. No legal principle carves illegitimate rulings into stone."
The court had it right when they ruled in 1895 in Pollock; and that was made when the "state' rights" wounds of the Civil War were still quite fresh.
* Ban assault rifles on trading floors. Aren't the assortment of hatchets, Bowie knives, and sidearms like Army .45s that now litter trading desks enough? Stop the killing!
Just wanted to make sure you read to the end of the column.
