DALLAS -- After years of cut-throat competition from bond firms anxious to be its financial adviser, the Missouri Board of Fund Commissioners last month got the ultimate low bid: a fee of zero.

The board, which is the only agency to sell the state's triple triple-A general obligation bonds, promptly accepted. It hired St. Louis-based A.G. Edwards & Sons as adviser for a planned July competitive sale of refunding and new-money water pollution control bonds that exceed $300 million.

A.G. Edwards beat out 12 other firms from Wall Street. The high end of the range was a standard financial advisory fee of $1.50 per $1,000 of bonds, while second-placed Boatmen's National Bank of St. Louis asked for six cents a bond. State officials said one-third of the bids were so low that the firms would have lost money on the transaction.

Why are so many brokerages willing to lose money to work for a Missouri issuer?

Investment bankers and state officials say experience with the board is a priceless credential in winning bond work from other state agencies. They also note that the financial adviser is not prohibited from competitively bidding on the Missouri board's bonds.

"People in the [bond] industry tell me they look at this as kind of advertising," said Missouri commissioner of administration Dick Hanson, a member of the six-person board that hired A.G. Edwards on April 30. "They say they can use it when they go to other entities in Missouri."

The other five members of the board -- the governor, lieutenant governor, treasurer, auditor, and attorney general -- often sit on or influence the boards of other state issuers who hire underwriters. "It's a good chance to show off your stuff," said a Missouri investment banker who asked not to be identified.

Asked why the firm was willing to work for free, Amelia Bond, an A.G. Edwards Vice President, said, "It is very valuable business for this firm in the overall picture of things in Missouri."

Under the terms of their contract, A.G. Edwards will receive no fee as financial adviser. The firm will be reimbursed for rating agency meetings or other expenses it is asked to cover on behalf of the board, but not for the traditional costs of telephone calls, trips to the capital in Jefferson City, copying, and express mail.

Mark Kaiser, a staff aide to the board, said that even though this is the first time the fund commissioners have been faced with a zero-fee bid, the competition for both financial advisory and bond counsel work has historically been aggressive.

"In the last couple of years we've had some fees around $2,000," he said. "None of those firms have made any money, and I guess that A.G. Edwards decided that they were going to risk losing the business so they bid no fee at all."

While low-bid awards are often criticized in the bond industry, state officials note they are receiving bids from established, reputable firms. "They can all do a good job for us," said Hanson.

State officials defend allowing their financial adviser to bid for the underwriting, which must be done through competitive bid under Missouri law. "We don't feel like it gives [A.G. Edwards] any advantage because on sale day they have to bid like everybody else." Kaiser said.

Last month, the board also hired Thompson & Mitchell in St. Louis as bond counsel for the July deals, which are expected to include $30 million in new-money issuance and the possible refunding of 10 series of outstanding bonds that could total $300 million.

Thompson & Mitchell was the lowest of the 10 bidders for bond counsel, with a fee estimated at about 8.6 cents per $1,000 of bonds. The firm barely edged out Kansas City, Mo.-based Gilmore & Bell, which bid nine cents a bond. Kaiser said the highest bond counsel bid was $1.10 per $1,000 of bonds.

Rhonda Thomas, a bond lawyer at the winning firm, said that law firm also seek to work for the Missouri issuer because the "prestige" can be helpful in winning other business. Asked if bond counsel bidding could become as competitive as the bidding for financial adviser, she responded, "I don't think so ... We have never acted as bond counsel without being compensated."

State officials trace the history of the low bids back to 1986 when Missouri firms began aggressive bidding in an effort to break Wall Street's lock on the board's deals. In 1983, for example, now-defunct E.F. Hutton & Co. was the board's. financial adviser with a fee of $75,000 A.G. Edwards broke the hold in 1986 with a fee in the $50,000 range. Bids have dropped precipitously since then.

Jim Moody, former state commissioner of administration, said that firms have been willing to lose money on the deals because it opens doors with other issuers. "They see it as a loss-leader," he said.

Moody is now a consultant affiliated with A.G. Edwards, but he said he will play no role in advising the Board of Fund Commissioners he once sat on. He cited a personal policy and a one-year conflict of interest law which bars former state officials from working for their old agencies.

Now that the mold has been broken and bidding for the financial advisory work has hit zero, officials say it is possible that other firms could submit no-cost bids in the future. Kaiser said that in the case of multiple no-cost bids, a firm's previous experience with the board would be considered a major factor in awarding the contract.

At least one winnerr of an advisory contract in the past, Boatmen's National Bank, does not plan to match rival A.G. Edwards' zero bid. "I won't do it for free," said Bill Darmstaedter, vice president and manager of public finance at the bank. "I have some morals."

Bond officials say they have heard the sarcastic suggestion that firms could offer to pay Missouri for the right to be its financial adviser -- which is prohibited by law. "We've been joking about getting them all together in a room and starting the bidding," Kaiser said.

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