WASHINGTON -- "Stop us before we kill again!"
No, that isn't the headline on a tabloid screaming the gory details of a mass murder -- just a worldly translation of a bond lawyer's indirect cry for help from the Internal Revenue Service.
Henry S. Klaiman, a partner with Brown & Wood in New York City, made his plea at a meeting in Chicago of the National Association of Bond Lawyers.
His speech raised an excellent point when it called upon the IRS to give the municipal bond industry more timely guidance on emerging complex transactions and products, such as gray boxes, derivatives, and portfolio sales.
The bond industry and the IRS "would be better served if the IRS were to give guidance before these products escalate to the point where confusion reigns" and grow "into 900-pound gorillas that the IRS cannot practically control without upsetting the market."
Mr. Klaiman did not specifically say it, but he obviously was asking the IRS to quickly investigate and issue rulings on new products it feels are abusive, rather than repeat its mistake of the mid-1980s.
That was when the agency waited to halt abusive escrow and black-box deals until long after they had spread like cancer throughout the market. If the IRS had gone after some of the early escrow deals, such as the South Tucson and Guam issues, the abuses certainly would never have spread as far as they did.
While criticizing the IRS for delays in giving guidance on new financing techniques, Mr. Klaiman also admitted that woeful understaffing explains much of the agency's poor record.
That is the crux of the problem facing both the IRS and the tax-exempt market.
IRS policy officials who deal with tax-exempt securities have been tied up writing and rewriting rules to carry out the massive tax law changes enacted in 1986. They don't have the time to investigate new financial techniques and tell both actual and potential participants whether the transactions may get them into trouble.
The one obvious solution is for the IRS to take the long-needed step of beefing up its tax-exempt bond policy staff so it can provide timely rulings rather than trying to halt the use of questionable new products only after billions of dollars worth of deals have gone to market.
Of course, whether or how soon that happens is doubtful in the face of the current budget outlook.
But there is also another partial answer -- one that should be evident.
Rather than expecting the IRS to save the tax-exempt market from itself, bond lawyers, issuers, and underwriters should protect themselves and their market by exercising reasonable self-restraint before leaping headlong into transactions that could trigger a new scandal.