Competitive bidding will be dead by the year 2000.
We don't think so, but Arthur Spector, managing director and manager of the public finance department of Prudential Securities, does. "I believe that the advertised sale of municipal bonds as we know it has become a relic of the past and that, by the year 2000, the advertised sale will be dead. In fact, it will be dead and forgotten," he said recently at the Northeast State Treasurers' Conference in Rockport, Maine.
If we can boil down Arthur's argument correctly, it goes like this: Negotiated bond sales have grown tremendously over the past 20 years because the projects that local governments have taken on -- housing; health care, student loans, and so on -- have expanded and become complex. At the same time, financing methods -- such as zeros, put bonds, floaters, and derivatives -- have become much more sophisticated.
To gain the confidence of investors in this increasingly elegant market, there must be good disclosure, Arthur says, and he couldn't be more correct. More and better information must be provided to the marketplace simply as a by-product of the greater complexities of modern financings.
"The notion that an issuer is well served to establish a simple structure and reduce the decision to a single bid at a single point in time is inconsistent with the increasingly volatile and dynamic nature of our markets today," he told the Northeast treasurers.
For all the truth in this argument, it forgets that massive portions of the municipal market are not sophisticated -- on purpose. Furthermore, not all Wall Street sophistication is loved across the land -- with good reason.
Grady Patterson Jr., treasurer of South Carolina, last year took a look at the competitive versus negotiated debate and said: "Remove doubt and suspicion -- sell at public auction." Michael Daun, comptroller of Milwaukee, said, "The more competition, the lower the price."
But Robert Lenna, executive director of the Maine Municipal Bond Bank, warned that restricting financing to competitive sales would only destroy opportunities for creativity and precise timing.
We love these arguments because they never end. There's truth on both sides. The Bond Buyer is biased, of course, because competitive bond-sale advertisements help pay our salaries, but that doesn't keep us from coming down four-square in favor of both kinds of bond sales.
We expect both kinds of sales to be around long after 2000, but it was still great to hear Arthur Spector make an unequivocal prediction to the contrary. No weasel-wording for him.