This story was reported by John J. Doran, Aaron Pressman, and Sharon R. King in New York; Geoffrey A. Campbell in Washington, D. C; John Racine in Dallas; April Hattori and Karen Pierog in Chicago; Keith DuBay in Denver, and Dennis Walters in Los Angeles. It was written by Doran.
Market participants reacted with a mixture of cynicism, concern, and praise to a proposal by the Municipal Securities Rulemaking Board to ban some political contributions and improve disclosure.
In an industry that has been tarnished in recent months by revelations of alleged wrongdoing, a number of its members welcomed the MSRB proposals because they offered hope and redemption.
Others, however, said the proposals did not go far enough, went too far, or would have no impact.
But David Clapp, a partner and head of the municipal securities at Goldman, Sachs & Co., and chairman-elect at the MSRB, said the market should wait for the formal, written two-pronged rule before drawing any conclusions.
"I think this proposal is quite aggressive in relation to the do's and don't's of political contributions, but I would caution everyone to wait until the final rule takes shape." Clapp said.
The municipal bond industry in recent months has been rocked by one account after another involving alleged unethical, unprofessional, or even criminal behavior by its participants, public officials, and bond issuers.
In the spring, it was reported that federal investigators were probing both Wall Street and small bond dealers and financial advisers in connection with a New Jersey Turnpike bond refundings and alleged kick-back schemes and influence peddling.
A short time later, Gov. Jim Florio banned almost all negotiated bond sales by the state and state authorities, and recommended that local issuers in the state do the same.
In Massachusetts, the U.S. Attorney in Boston and the state's inspector general are reviewing underwriting practices and contracts between firms and issuers in the state, including the Massachusetts Water Resources Authority. In particular, the investigators are looking into private contracts between Mark S. Ferber, a banker and financial adviser who was recently dismissed from First Albany Corp. over the matter; Lazard, Freres & Co.; and Merrill, Lynch & Co.
Later, the MWRA and the state removed Lazard, First Albany, and Merrill from syndicates underwriting their bonds.
Assessing the events of recent months and the MSRB proposals, a major portfolio manager in New York said, "There's only one solution, whether you're talking about the Mark Ferber problem, the New Jersey problem, or just the political contribution problem: You have to have a larger percentage of the investment-grade, plain-vanilla deals done competitively.
"As long as the pricing is not competitive, you have a problem. This [MSRB proposal] sounds like a Band-Aid, a weak Band-Aid," he said.
A senior banker at a Wall Street firm said, "Fundamental, technical factors affect the market much more than something like this," and "there will always be a place for negotiated underwritings.
"The New Jersey thing caused an almost knee-jerk reaction on competitive sales that might be right or wrong," he said. "But it's ironic since you could not have sold a large deal like the New Jersey Turnpike deal in a competitive offering."
One California-based dealer, who asked not to be identified, said he has a "residual concern" about the ban if it also drives those in the public sector to turn away from negotiated deals in favor of competitive issuance.
There are "good reasons" to negotiate many issues, the dealer said, adding that it would be unfortunate if a contribution ban ended up an overriding factor in choosing the method of sale.
Cornell L. Moore, general counsel for Miller & Schroeder Financial Inc. in Minneapolis, said the rule that would prohibit political contributions is neither "appropriate or fair."
"My personal opinion is that it is an invasion of privacy," Moore said. "How can you restrict free-will giving?"
Meanwhile, an executive at a regional firm in the Mid-Atlantic region greeted the announcement with relief.
"It will be a pleasure not to be under pressure to give to politicians in order to be considered for bond business," said the executive, who asked not to be named.
Another executive from the same region, who also requested anonymity, said, "Anything that can be done to clean up the system, so that firms are selected on the merits rather than because of their political contributions, is to be applauded and will be a good development."
Scott C. Sollers, partner and chairman of the executive committee at Stone & Youngberg in San Francisco, said he sees merit in the ban proposal.
The abuses might be more perceived than real, he said, but "to the extent you can move away from perceived abuses, I'm all for it" to remove any cloud over the municipal industry. Sollers said a ban would have little effect on his firm since contributions are "such a minor part of our operation."
In Texas, bond executives said they were not surprised by expected proposal, but complained that it could be become too cumbersome to comply on a state-by-state basis.
"Every state is different that we do business in. In one state the boards are appointed, in others they are elected. How do you draft fair rules to deal with that?" one investment banker said. "Whatever they come up with may be too tough for even an honest firm to comply with. "
In the West and Rocky Mountain Region, bankers said they were pleased with the MSRB's announcement.
Jack Pepper, director of municipal finance at the regional house Hanifen, Imhoff Inc. in Denver, said big contributions from large firms often give them the advantage in picking up business. He said the rule would therefore help smaller firms.
"We support it 100%," Pepper said. "We obviously make political contributions, but many times these things get on to larger issues. Local dealers will just be out-spent, it's that simple. "
Pepper said he does not think dealers will lose their considerable clout in Colorado's legislature as a result of what the MSRB is proposing, adding, "We'll continue to testify as we always have. People will see there's not as much behind the scenes as people think."
At the Denver office of George K. Baum, senior vice president Alex Brown said some change is warranted, but added, "We shouldn't be singled out as someone who can't support candidates of our choice."
Wayne Nielsen, senior vice president and Denver-based regional manager of Kirkpatrick Pettis, a municipal underwriting division of Mutual of Omaha Insurance Co., said, "A lot of us in the municipal industry have been thinking about ways we could take the high road through our own professional organizations. The MSRB seems to be helping push us towards the ethical high road."
Robert W. Chamberlin, senior vice president of municipal research at Dean Witter Reynolds Inc. in New York, said, "I'd be hard pressed to see where this is going to create real problems for underwriters or the industry.
"I think I'm favorable to the idea," Chamberlin said, adding that he believes any ban on contributions might be felt more by politicians who accept them, rather than underwriters. Chamberlin said he does not believe that Dean Witter has a position on the MSRB proposal.
One underwriter from a large Wall Street firm, however, said about the MSRB announcement: "No effect. It's meaningless. Ninety-nine percent of the business is aboveboard."
A public finance executive in another New York firm said, "We don't do any of these [contributions] to directly gain business. You do what is necessary to be in the game, to be considered, to present your credentials.
"If politicians stopped asking, we'd probably stop giving," he said.
He said any move to disclose political contributions would not only reveal firms making contributions, but also politicians and issuers who accept them, he said. This might curtail any inappropriate actions by either side in the future, the public finance official said.