The humorist Will Rogers had a line about there being no innocent bystanders in New York City -just take a shot, and you'd hit a guilty party.
Well, right now, and for the foreseeable future, that's the municipal bond market. Scandals of various degrees of seriousness are erupting like brushfires. As one dejected banker put it to me recently, "Performance used to be the thing. Now, it's appearances." A financial adviser observed, "Everything may not be going competitive, but there's a lot more talking involved in the political process, defending why an issuer should go one way or the other."
Right now is scrambling time as various constituencies look skyward and see that the Hindenburg is about to hit the landing mast, and that fire has broken out amidships. Maybe, they think, the problem is disclosure, or perhaps the problem is inadequate information from issuers. Or maybe the Tower Amendment should be repealed, and issuers forced to register with the Securities and Exchange Commission if they want to sell debt.
Or maybe, most likely, most people still don't get it.
What people are talking about both in the market, and soon, on Capitol-Hill, are symptoms. People want to tackle the symptoms. They figure that if they deal with the symptoms, the sickness itself will go away.
Let's take a look inside the medicine chest.
First we've got: Mandatory disclosure from issuers of financial information. Let's construct a big, expensive data base and force issuers, except really small ones, to send in official statements and other routine financial information.
This, I suppose, was once thought a convenient way to keep investors up to date on what they had in their portfolios, and to keep them from being burned by defaults. The catch is that most defaults are from those really small issuers, who are often exempt from such "mandatory" rules. This whole disclosure business was fueled by a vociferous band of municipal bond analysts. It will do almost nothing for what ails the market.
~Oh, How Terrible!'
Then there's: Disclosure of political campaign contributions from underwriters, to be listed in official statements. You know what? Campaign contributions, more often than not, have to be disclosed by elected officials anyway. Is a municipal bond buyer supposed to look in an official statement, and see that the firm that was the lead underwriter also gave the most to a certain elected official? And say what? "Oh, how terrible!"
As I understand it, contributions given "for the purpose of obtaining or retaining municipal securities business" would be prohibited by the MSRB's new proposed rule.
Am I the only one who thinks this sort of language is totally idiotic? What's an underwriter to say? "Well, we made these contributions because we're really interested in good government, not because we want to get business, of course."
And on the top shelf: Repeal of the Tower Amendment. Require issuers to register their offerings with the Securities and Exchange Commission. As Washington bureau chief Craig Ferris noted last week, this is an idea whose time has come. But it won't do much to cure the market's ailments, either.
Problem is Moral Turpitude
None of these solutions, although they may reassure the investing public, actually confront the problem.
The problem is broad-based moral turpitude, on the part of some issuers, and on the part of some bankers. "The municipal securities business has long been a cesspool of political corruption," as one congressman summed things up recently. That's the kind of statement that has to hurt everyone who has made a profession in the municipal market. So do stories like the Business Week cover, "The Trouble With Munis," and its editorial, "The Muni Market Needs a Clean Sweep."
Things have come to this pass not because the municipal market as a whole is underregulated, as so many critics charge, but because it is overregulated. Dozens of different rules, set by local, state, and federal authorities, confront the average municipal market participant daily. The amazing thing is that so many of them know the rules of the game, and how it is played, and so have built the market into a national institution. This institution has, for more than a century, functioned pretty well.
But now this institution is in danger. It is in danger as much from industry boosters, whose appearance on Capitol Hill routinely enrages Congress, as it is from the dozens of regulators who, when they get around to the municipal market, send in investigators who have to ask for definitions of GO and revenue bonds.
So what will cure the market? As a banker said to me a few weeks ago: "A banker has to have technical expertise as well as a network of relationships. Those who have one without the other are either geeks or hacks. You can't regulate relationships."
What the municipal market needs is someone who will look at relationships, who will look at ethics, who knows the history, and who knows how the market works. It needs someone, in short, to tie up all the loose ends. What the market needs is a czar. Someone more dedicated to straight and ethical dealings than to the next deal, or to choosing the site of the next board meeting.
What the market needs is its own Judge Kenesaw Mountain Landis, the first commissioner of baseball.
The muni market's Judge Landis should be able to levy fines that mean something, suspend companies and players, and deny market access to those who would destroy a national institution with their greed and double-dealing.
That's what will cure the ills that afflict the market.
