Most municipal bond market professionals have by now seen, and shuddered over, a long story in The Atlanta Constitution headlined "Bond Deals Pinch Taxpayers -- Voters Often Have No Say Over New Debt."
No doubt months in the making, written by a Pulitzer Prize-winning reporter with the aid of a data base editor who works on "computer-assisted reporting," the story analyzes how a number of localities in Georgia sell revenue bond debt, and promises to uncover "America's Hidden Bond Scandal."
In the course of the story, we read, among other things:
"Government officials are bypassing local taxpayers by turning to the merchants of debt," a "select group" of Wall Street lawyers and bankers who "design bond issues that do no require voter approval." This has resulted, writes the author, in a pattern of "inflated fees, noncompetitive contracts, profiteering, and fee splitting in the municipal bond business."
The industry is based upon "trying to get Podunk school or city or state to go into hock," says an expert at Louisiana State University. Another bond man admits, "The whole industry is smoke and mirrors. There is no regulation, and the powers that be like it that way." And: "Campaign contributions are a prerequisite to getting bond business."
I have never been afraid to "take on" the business, and have tackled a few of these subjects -- campaign contributions, negotiated versus competitive underwriting -- in this column, setting up a flare here, launching a torpedo there, exploding a mine elsewhere. Minority-and women-owned underwriters, setting priorities in distribution of bonds, syndicate practices, the proliferation of independent authorities, bond insurance: All these, as well as what a friend calls "antiquities and collectibles," have come under the eye of the Spectator, who "oft sees more than the gamester," as an edition of the Oxford dictionary puts it.
I always read what the general press, and even the financial press, has to say about the municipal bond market with a great deal of interest, and usually with a great deal of disappointment. The Atlanta Constitution article, despite the purported amount of time the author spent on it, is no exception.
The municipal bond market, as those who work in the field know, is a somewhat quirky thing; to those who do not take the time to know it, it is almost incomprehensible. At The Bond Buyer, I often figure it takes a rookie at least a year and a half to get a handle on the market, to write about it with some level of knowledge and authority. Sad to say, it is almost invariably disheartening, and infuriating, when one sees a journalistic "expose" of the business. In the past, I have pointed out the usual blunders, whether they are on "60 Minutes" or even in Barron's.
And so with this year's journalistic contribution to investigative reporting. Once again, the author takes the usual, Freudian approach, ascribing the symptoms of sickness in an individual to the population at large. Once again, we read about how the municipal market is a disaster waiting to happen, in apparently desperate need of someone, somewhere to step in and throttle the pirates of public finance. Tell the SEC! Commissioner Roberts, are you listening?
One longs to responds to the Constitution's story in general and in detail. There are a few outright errors. Last year, the story says, "a record $177 billion" in municipals were sold. It's well enough known that 1985's roughly $210 billion was the record.
Again, the author writes, "Until a few years ago," voters approved debt, and issuers sold general obligation, tax-backed debt. Revenue bonds actually date from 1885 when Wheeling, W.Va., posited the notion that principal and interest on water works bonds should come exclusively from project earnings. Chicago, in 1905, sold bonds whose sole backing was user fees. The first state revenue bond was sold in 1920 by Kentucky.
The main contention of the Constitution piece is that the explosion of revenue bonded debt is a national scandal. He would have one believe that revenue bonds are a relatively new sector of the market. Once again, he states the obvious in terms of the scandalous. The change in the municipal bond market, from one where the GO bond was king to one where revenue bonds made up the majority, occurred not "in recent years," but in 1976. The next year negotiated topped competitive bidding, signaling the way things would be done.
As always, there are kernels of truth in this story, especially when it comes to the author's analysis of negotiated versus competitive bidding. But in a trillion dollar market, small horror stories, collected over the course of years, abound. More than anything, it is the sort of broadbush treatment of "scandal" that is so exasperating. Bankers are "merchants of debt," an overworked play on, of course, "merchants of death," a term for arms dealers and manufacturers.
The business about a "select group" of Wall Street lawyers and bankers is beneath contempt, reminiscent of a 1930s streetcorner rant about a Wall Street cabal. In almost every instance of skulduggery, it is not, in fact, the big Wall Street firm whose operations are monitored closely by the Securities and Exchange Commission and everyone else, but the tiny, fly-by-night operator.
The bankers' business is to make issuers "go into hock." Well -- of course it is. But with interest rates at or near recent record lows, it can be pretty effectively argued that an issuer would be fiscally irresponsible if he didn't seek to bond out certain capital plans now. And it's not as though the issuers are taking the money they raise and going to the gaming tables with it. The money they drum up goes toward things like schools, roads, bridges, police stations, education, and other public purposes.
Then there is unauthorized debt. The author would have you believe that taxpayers are routinely asked for bailouts by revenue bond issuers. In fact, that is a rare occurrence; and more often than not, it's the bondholders, not the taxpayers, who are at risk.
But that's not all: "The interest these bonds earn in tax-free, so every bond carries an additional taxpayer subsidy." Here we return to an old chestnut, whether municipal bonds are a "state's right," or some sort of a subsidy granted by the Treasury Department. And on this one, I'll stick to my guns. Tax-exempt finance is not a subsidy, but a right. This puts me in the Supreme Court's minority opinion, but so it goes.
If one follows The Atlanta Constitution's line of argument reductio ad absurdum, what can one think of but destroying the municipal market and replacing it with a vast, impersonal, and probably federal bureaucracy. Frankly, even "independent" local authorities are far more responsive to their constituents than such a bureaucracy would be. They are, to be sure, messier than a streamlined federal-or state-level machine, but they inevitably must be more responsive.
I wrote two years back, in response to a Barron's article about municipal bonds being the "new junk": If history is correct, there will be around 12,000 separate issues coming to market this year, representing, let us say, 8,000 different issuers. Most of those issuers are 'unsophisticated.' And most of them will get their finances done in a straight vanilla, fairly quiet way, without fraud or litigation, with no doubts about their full faith and credit pledge, and with the help of squads of bankers and lawyers who do their business in a square and honest fashion. This is the fact."
I stand by this today. The whole business is "smoke and mirrors"? I mean, really.