Q: What is your general impression of the U.S. debt markets, especially the municipal market? A: I think there are a lot of problems with the debt markets in this country. There are problems with insider trading, which we're seeing more and more of. There are problems with disclosure. There are enormous problems in terms of political contributions. This market is supposed to be the safest of the safe. [But with all this] kind of game-playing going on, it looks like an Oriental bazaar. Q: Will the combination of this week's voluntary ban by 17 firms on political contributions and the Municipal Securities Rulemaking Board's proposed rule solve the contributions problem? A: Nothing is going to eliminate the problem, but we can do a lot to minimize it. As soon as a firm or exchange or an area is compromised in terms of its basic integrity, it becomes a much more expensive place to do business. We can't afford to have the perception that has been reported on all over the country now that this is a payoff business. The customer is going to demand a higher premium for what he's buying. It's going to be more expensive to sell, and a whole host of problems arises. Q: Why are you concerned about improving secondary market disclosure? A: I'm concerned whether the retail customer really knows what he's buying and what he's paying for. I doubt that retail municipal and corporate bond customers really know what they are buying. They buy what their broker tells them to buy and very often they don't understand all of the details. Today it's more complex. They don't know whether their bond is rated, much less what it is rated. They don't know what price they are really paying and they don't know about call provisions plus a whole host of other things that I think they should know about. Q: Ideally, what would you like to see done to improve secondary market disclosure and political contributions? A: I think we have much improved disclosure in the primary markets. In the secondary markets, it's almost negligible. And I want more disclosure. As to how to get at that, I'm not exactly sure right now. My hope is that the issuers will be persuaded to do that out of concern that if they don't do it on their own we'll find a way to [make] the dealers responsible for doing it for them. I have a number of notions of how to do this, but I don't want to preempt my more fully exploring these issues. Q: Do you think the municipal industry is taking the Securities and Exchange Commission seriously, and what do you plan to do if it is not? A: If they don't do what I hope they will do, we will take other action. I would regard that as problematical and probably a personal failure if I have to go that route. But I think we have enough tools that we can show them we mean business. We have a lot of leverage over the broker-dealers. It may not be in municipal bonds, but it's in a lot of other things they want and they need. They will know that I'm serious about it. Q: You appear to be saying that you are going to rely first on jawboning the industry to improve disclosure and curb political contributions. Where does the jawboning stop and at what point might it be necessary to push for legislation? A: I don't know the answer to that. I'm encouraged by the response up until now. Sixty days from now I'll be either more or less encouraged. Q: Are you pleased with the MSRB's attempts to clamp down on political contributions? A: I was surprised by how aggressive they were on this issue. They are making sounds that I regard as encouraging. I am not going to say, and I don't believe for a moment, that anybody in Washington or anyplace else can eliminate the kind of favoritism that creeps into the marketplace. It takes all different kinds of form. But it has gotten out of hand in the municipal bond business ... outrageously out of hand. I think we can squeeze the outrage out of it but we are not going to squeeze favoritism out of our markets. Q: Do you think the MSRB's proposed contributions rule can be enforced? A: I think it is partially enforceable. No rule is foolproof. But we're better off than we were. What I liked about [Monday's meeting, where officials of 17 firms agreed voluntarily to ban contributions] is that the community appears to be impressed about our seriousness. the best way to stop it is if leaders of a firm say, "I'm not going to play this game anymore." We also need to look at lawyers, accountants, and consultants. But you can't dot every ~i' and cross every ~t.' Q: Should contributions be subject to a "de minimis" amount -- a level below which a contributor would not be subject to investigation? A: I haven't though about it. My first response to that is that it would appear to be reasonable. I think it's the bundling of these amounts ... The comptroller of the state of California is coming to New York City for breakfast ... Everyone should give $250 because we've got to raise [a given amount] to be respectable. It's that kind of thing we have to stop. There's a lot of that going on. Q: The Public Securities Association and other organizations have warned that a rule prohibiting a dealer from selling a bond in the secondary market if the issuer has not complied with disclosure standards possibly could shut down the market. Do you feel that's a valid concern? A: Yes, it's a valid concern. But the concern in my judgment does not outweigh the risk that is assumed by not having the disclosure. I think the advantages of disclosure are so great, overwhelmingly great, that if a small community feels they can't comply with that because of the costs, they should not be in the market. Those are the very bonds that investors can't afford. Q: Is the SEC going to hire more people that are versed in municipal securities? A: Yes. I'm looking at a variety of people who have expertise in this area that I want to come on board and assist us. Q: Are they are results from the investigations on influence-peddling in New Jersey? A: They're proceeding. We haven't announced anything. Q: What about Louisiana? A: I don't comment on investigations. Q: How concerned are you about the use of consultants? A: Very. From what I have already seen, I believe that consultants are being used to gain greater inroads into the underwriting of municipal bonds. I don't think those arrangements always work to the benefit of the [holder] of those bonds and sometimes not to the issuer of those bonds. Q: Will there be a likely regulatory response? Or will you try to form some kind of voluntary effort? A: The group that is meeting on political contributions has been asked by me to consider investment advisers, and consultants, and any of the other arrangements that are used to bring compensation to issuers of muni bonds. But I think with the increasing complexity of the kinds of municipal bonds being marketed, there is a legitimate place for certain kinds of consultants. To try to ban them as a group would be a mistake. Q: Would you say that hiring a consultant who has obvious inroads in city hall and is friends with the mayor is the same as making a political contribution? A: I would say that is far as I can tell, there is a legitimate use of consultants with the kind of technical expertise that I think today's markets call for. If a consultant fits that category, I think it's proper use of a municipality's assets. Q: How do you draw the line between hiring a consultant for his expertise and for connections? A: It's a difficult line to draw. Hypothetically, you could see a municipality hiring somebody that served as a city finance official of one kind or another who had great expertise and competence in terms of structuring certain kinds of financings. Another banking firm, however, might hire someone whose only function is his contacts. And it is very difficult to create a rule that distinguishes between those two. In some cases it becomes very blatant. Those are the cases that our enforcement people around the country are going to look at very, very carefully.

I think that today it's a little bit less fashionable to be hiring someone from the city comptroller's office in the expectation of doing business with the city. [A firm] will think twice before they do it. They'll question whether it really would look good now. If industry leaders speak about it, if other things happen, it will become still less fashionable to do it. That's the proper road to go. Q: Isn't there a question about how the people whose names are on the bonds, whose names are on the official statements, comport themselves with bankers? Hasn't that created part of the controversy? A: I think that is part of it. You may have one guy who has political contacts, but he still is a very professional guy. There are others who are noting more than contact people. That's characteristic of the way business is done in the world. People are hired because either their history or their relationships or their background give them access other people don't have. Part of that will always be a part of the fabric of American business. But when that gets out of hand in terms of payoffs, in terms of what's coming back, in terms of what's being given out, then it becomes worrisome, and that's what we are going to try to address. Q: You told a congressional hearing that the MSRB should require that confirmation statements show the dealer markup in a riskless principal transaction so that the customer can better evaluate the price. Some dealers oppose the idea because they say there is no such thing as riskless transaction. Are they just trying to prevent the customer from getting information? A: I believe there is a riskless transaction. It is hard for me to accept the notion of a highly rated bond being bought in the morning and sold in the afternoon and an hour later being [considered] non-riskless. Q: Will the commission propose a rule on riskless transactions? A: It is too early to tell. Again, there has been a lot of talking about this issue. I'm hopeful we can push the industry to do things without having the commission [write a] rule. Q: Will the SEC amend its Rule 2a-7, which sets quality and diversification standards for money market funds, to tighten those standards for tax-exempt funds? A: I'm not sure if it will be this year or not. Q: Do you support a rule tightening diversification standards? A: Yes. Q: Will the SEC beef up its regulations on derivatives? A: My concern relates to the level of understanding about use. There are legitimate uses for derivatives, such as hedging, increasing yield, and speculating. When those uses are either misunderstood or perverted, we run into problems. And I don't know that there are the kinds of controls in place to avoid problems coming up. Q: Are we going to see a suitability rule on derivatives? A: I'm not sure. Q: Are you thinking about it? A: No. I'm thinking about a lot of things. Q: Do you think the SEC will have to seek legislation to get the level of disclosure needed? A: There have been six studies of derivatives. All have said there is nothing inherently wrong, but none of them have addressed the issue of systemic risk. I simply don't know the answer to that.

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