The municipal finance industry has received several severe blows during the past few weeks with the decisions by Chase Manhattan Bank and Van Kampen Merritt Inc. to abandon the municipal bond industry. This follows the disappearance of other distinguished names, such as Citicorp, Salomon Brothers, and L.F. Rothschild & Co.
Although stability and continuity were the hallmarks of the municipal bond industry through the mid-1980s, it currently is witnessing wide management turbulence, financial uncertainty, and organizational unpredictability.
With the passage of onerous congressional tax "reform" acts during the last decade and with financial deregulation paralleling tax reform, the quiet waters of public finance have been swept by multiple shock waves. The acquisition of investment banking firms by larger firms, insurance companies, and foreign financial organizations dramatically altered the pattern of decision making that traditionally prevailed in this industry.
The bottom-line income generated by municipal dealers now represents a smaller percentage of the new parent's total profitability. In turn, public finance activities are viewed as just another profit center and are compared with the profitability of other departments.
The measurement of profitability of the various investment banking functions has also been moved, in some cases, from economic comparisons within the domestic investment and commercial banking industry to measurement of comparative effectiveness and profitability on the global scale.
When viewed from this globalized perspective, municipal finance became the stepchild of many financial institutions.
As decision making concerning trading, underwriting, and public finance has shifted from the domain of the fixed-income divisions to the level of corporate board rooms and holding companies, the new financial decision makers view municipal bonds as a specialized nuisance, hemmed in by complex tax and financial regulations, greedy politicians, and an unfriendly Congress.
Using the classic evaluation techniques of profitability analysis -- such as return on equity, risk diversification, and other hot business school tools -- it has been easy to eliminate municipal bond departments. After all, not many senior corporate executives are interested in attending a cocktail party and a barbecue with commissioners of a sewer district on a July 4th weekend in order to get acquainted with the political decision makers who may select their firm for a $100 million project.
In this new world of capital markets, as viewed from the public finance perspective, there are many losers and only a few winners. Among the losers are respected financiers who suddenly lost their jobs and livelihood during this recession after years of experience in the public finance industry.
The other group of losers are municipal issuers. These officials labored many long hours in writing and reviewing requests for proposals, selecting investment bankers and financial advisers, and then working with the professionals to bring about their financings.
In the corporate finance sector of the capital markets, an issuer could quickly replace a financial institution no longer providing advisory or investment banking services. In the government and not-for-profit fields, however, this is not possible.
To protect the taxpayer and maintain an open democratic public discussion, all entities must follow complex procurement procedures. In addition, since many projects have unique qualities and characteristics, it takes months, if not years, to develop a team with the know-how required to accomplish the highest-quality financing at the lowest cost.
The tangible and indirect costs of delay and turmoil created by the sudden liquidation of municipal bond departments cannot be truly measured and absorbed by municipal issuers.
Should the government issuer be expected to forgo its financial advisory and investment banking team at the instantaneous whim of unnamed and faceless senior corporate decision makers?
Not only is the answer no, but municipal issuers must develop a fail-safe mechanism to prevent this costly slap in the face from becoming a more frequent event.
The usual dictum of issuers selecting, for stability and continuity, a banker or financial adviser with a respected name such as Salomon or Chase is no longer valid.
Since many large projects must be handled by entities having the credibility and staying power for the long term, issuers must organize to create an institute that would serve as the adviser of last resort for issuers.
This institute would be a not-for-profit entity. Its members could be the state, county and local government issuers, via their trade associations, and other specialized organizations. Many displaced investment bankers could affiliate with this institute. The organization could function without walls with a very small administrative staff coordinating the work of the advisory teams.
The advisory activities of a municipal finance advisory institute will complement the work of the independent advisers or consultants engaged by municipal issuers.
As the Municipal Securities Rule Making Board proved to be a very credible vehicle for collective action, the public interest would be served by having more than one adviser for large public projects. One of the advisers would be an entity outside the normal supply, demand, and profitability considerations of financial markets.
Since many large corporations use multiple law firms to meet their legal needs, it would give solid fiduciary protection for public and non-profit issuers if they did not place all their eggs in one basket and rethought their procurement of advisory services.
The public good would be served by retaining a not-for-profit institute for advisory services. In addition, the long-term capital needs and programs would be protected as we raft through the white waters of the turbulent capital markets.