NEW BRUNSWICK, N.J. - Officials at the New Jersey Turnpike Authority yesterday portrayed themselves as virtual bystanders in the syndicate selection process for the agency's 1991 and 1992 refundings, saying they left every major decision regarding which firms would participate to their financial adviser, Lazard, Freres & Co.
"It was really placed in Lazard's hands," said David J. Goldberg, the authority's chairman. "The reason for retaining a financial adviser is to get the expertise that they bring to the table."
Goldberg, who said he believes Lazard did an "outstanding job," made his comments following a turnpike board meeting at which authority officials released a 22-page summary of the selection process.
The summary, written in response to questions raised by an ongoing federal investigation of the deal, said Lazard prepared the list of underwriters and decided who would act as senior managers on the various pieces of the refunding. The authority said it approved the list exactly as it was presented by Lazard.
Lazard was also responsible for ensuring all the senior managers fairly allocated bonds to other members of the syndicate in a distribution the authority hoped would be about 50% for the senior manager, 40% for the co-managers, and 10% for the selling group.
Donald L. Watson, executive director of the authority, said he is generally satisfied that those allocations were awarded, although he said Merrill Lynch & Co. was extremely slow in providing the authority with documentation detailing the allocation on their $1.6 billion portion of the deal.
Although Lazard decided who would be selected to the syndicate, Goldberg said he did not ask officials from the company to appear at the board meeting to explain the decisions because he was afraid of "interfering with or complicating" the federal investigation, which is examining whether Merrill Lynch and other firms improperly used political connections to win the most lucrative slots on the turnpike's syndicate.
"I'm trying to walk a line between explaining what the authority did and not injecting ourselves into an ongoing investigation," the turnpike chairman said.
The turnpike earlier this month said it did not have any written record detailing the decision-making process on the syndicate selection and recently asked Lazard to supply some sort of documentation explaining how the firms were picked.
Lazard, through its legal counsel Wachtell, Lipton, Rosen & Katz, last week sent the authority a six-page chart in response.
The chart, released yesterday with the turnpike's summary, lists all 11 firms that asked to be given senior underwriting positions on the turnpike's $2.9 billion refunding program.
It summarizes each firm's experience, capital, stability, fee proposal, and other characteristics, and indicates whether Lazard recommended them for a senior manager role.
Three companies, Merrill Lvnch, Goldman, Sachs & Co., and First Boston Corp., were selected as senior managers based on Lazard's recommendation. The other eight that asked for the lucrative work were given co-manager positions instead.
The authority's summary, presented by executive director Watson, described how the turnpike's previous foray into the municipal bond market, which featured a $2 billion deal underwritten by Smith Barney, Harris Upham & Co., was so widely criticized that it convinced them of the need for a financial adviser.
He pointed out that Smith Barney, as the authority's previous de facto financial adviser, not only recommended financing plans, but was also later selected to underwrite the very deals it proposed.
Watson said in contrast to the $38.8 million in underwriting fees generated by deals brought to market during that period, the turnpike's underwriting fees on the 1991 and 1992 refunding issues were $20.1 million. He attributed that at least in part to the help Lazard offered the authority in keeping costs under control.
The authority said the selection process this time around included oral interviews led by Lazard in early June 1991. Each of the 11 firms were asked a series of identical questions. Goldberg said he did not attempt to "score" the responses, as other issuers say they often do, because he did not feel competent. He said those kinds of assessment were left to Lazard.
But Goldberg said other factors did make an impression on him. For example, he said some firms waffled on the question asking how a firm would respond if the deal were proceeding and it become obvious they would suffer a loss on the underwriting due to unfavorable market conditions.
Goldberg said some companies were forced to admit they would have to walk away from the deal rather than swallow a loss. But he said the firms that eventually were selected as senior managers all said they would stand by the turnpike even if the market turned against the deal and resulted in a loss for the company.
Goldberg stressed repeatedly that no one appears to be questioning the structuring of the deals, which he said were handled and managed with the utmost professionalism.
And Watson noted that in contrast to the Smith Barney problems of the mid-1980s, "there was no public criticism whatsoever of these [syndicate] selections at the time they were announced."
Goldberg said that despite the unprecedented attention the deal is receiving, the only thing he would now do differently is make sure there was some sort of documentation memorializing the syndicate selection process. He said he would do this not because he feels there was anything improper about the turnpike deal, but because it would be easier to explain the selection process later if questions arise.