At the interface of finance and legislation the laws of physics apply: Every action has a consequence, every benefit received results in a cost somewhere else.

We who believe that the financial markets are efficient, or at least relatively efficient, see investment products existing together in a rough equilibrium, interfere with this balance by legislation, however well intended, and the result is likely to be unintended consequences. America's glut of office space is just one example, producing benefits for some and long-term problems and costs for others.

On July 29, 1992, without much public debate, the U.S. Senate Finance Committee adopted HR 11, the Revenue Act of 1992. While the bill contains a number of valuable provisions, there is one that threatens to have a chilling effect on the entire industry with consequences that could negatively affect all Americans in many unintended ways. The act propose to eliminate investor income restrictions on the tax-exempt use of United States Series EE Savings Bonds that are redeemed to pay tuition and other educational costs.

For those who may not remember, Series EE Bonds are deep-discount, variable-rate demand notes that are unconditional obligations of the U.S. government. Their rate is indexed to the taxable five-year Treasury note, which is currently yielding 5.58%. Moreover, the Series EE bonds have a guaranteed minimum yield of 6% when held for five years a minimum of 4.16% during the first months of ownerships, increasing each six-month period until the fifth year.

Series EE bonds can be purchased at any bank or, in some cases, by payroll deduction. Purchases can be for as little as $25 for a $50 bond and denominations are available up to $10,000. They can be redeemed for cash at any time and any bank upon presentation.

Now consider this product as a tax-exempt investment instrument with no income restrictions, no changes in the indexed or floor rate of interest, and with the only limitation being that it must be used for education. As a former state public finance director and an investment banker, I have grave misgivings.

Speaking as the recent director of public finance for the state as New Jersey, if this product had been available on my watch it would have cost the taxpayers of the state millions in higher interest rates. We might have been pricing our bonds off the Series EE. Consider that today one-year and 30 year prime grade GO bonds yield about 2.4% and 5.85%, respectively.

In addition, these bonds would have cost the users of health-care services millions in higher interest rates ... and the users of water and sewer systems, and the users of our highways, and property tax payers who pay for public schools, and so on. In short, this is likely to be a subsidy with a serious and expensive ripple effect on the rest of the society. Everybody would pay the cost of the resultant financial dislocation.

That, however, might just be the start. What of the tax-exempt mutual bond funds? How might they have to revalue their existing bond portfolios to be competitive with the Series EE's? And the bond insurers? Will the retail customer, who has come to look to insured bonds, still be there? Will the insured bond fund still be there?

What of the private and public sector's growing response to the need to save for college through a variety of investment vehicles and ideas: zero coupon college savings bonds, tuition prepayment and defeasance plans, and a host of targeted mutual fund ideas. Will the Series EE initiative preempt this growth area? Or will the financial need of the federal government and the growth of government-sponsored enterprises eventually crowd out the public/private sector partnership that has made our industry most efficient in the formation of capital for the public infrastructure?

Our industry needs to reply to this new and potentially preemptive competition from Washington.

Mr. Singer is a vice president at Fairmount Capital Advisors in Philadelphia and served as director of public finance for New Jersey from 1990 to 1992.

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