The current debate and stories that have appeared in The Bond Buyer about negotiated versus competitive bidding have focused on how negotiated bidding has corrupted the political process through the soliciting of campaign contributions by elected officials involved in the underwriter selection process. This is certainly a powerful argument for requiring broader use of competitive bidding in how over $250 billion in new municipal debt is sold, but there is another more compelling reason to move away from negotiated underwriting.

Bond issues sold through negotiated bids are largely presold by the underwriters well before they are actually taken down. The presales are invariably made to large institutional holders such as bond funds and insurance companies. This results in few if any bonds ever becoming available for small retail investors. Such investors have become the backbone of the municipal bond market since the Tax Reform Act of 1986 took away most alternative tax shelter investments. Despite the rapid growth of bond funds, direct household investment still makes up over 50% of the market.

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