There is a lot of talk right now about negotiated versus competitive sale of bond issues, all due to the New Jersey Bond Scandal of 1993.
It's a subject I had a lot of fun with in these pages in 1990 and 1991, much to the consternation of a lot of bankers. My point at the time, and I have not wavered in my opinion since then, was that municipal bond issues were being overwhelmingly brought to market by negotiated sale, and I thought there was something wrong with that.
I thought it was wrong because, at least at the time, negotiated underwriting was demonstrably more expensive than competitive underwriting, in terms of underwriting fees. Bankers contend that over the long term they can save issuers more money by using more complicated financing structures that require negotiation. And sometimes this is so. I have always had a problem, however, with "ideas" apparently so complex that they can't be explained to the average taxpayer. And, of course, we are now finding out that negotiated financing is more expensive in other ways.
Measured by par value, over the past few years around 80% of "the market" has routinely been done through negotiation. Last year, measuring the market by the numbers of issues sold, 4,125 issues were done by competitive bid; 7,987 were done through negotiation.
Any way you slice it, I said then and I say now, that is far too many. All those deals done through negotiation last year were not all unusual, complicated, too big or too small, irregular, or poor credits. These have all been reasons in the past to go negotiated.
At the time, I managed to cull a few voices from the wilderness. There was a section from one of my favorite books, "An Elected Official's Guide to Government Finance," which stated unequivocally, "Competitive sales should be used to market debt whenever feasible." and then backed it up. The author wrote that in 1984, but when I asked him about it in 1991 he said: "Nothing has changed. There's still the potential for political abuse with negotiation ... On negotiated issues, you have to worry about the back-slapping and arm-twisting that brought the deal in the door."
I wonder, with wistful detachment, how many local officials and members of the Government Finance Officers Association read the "Guide." Few of them appear to have read the section on competitive sales. Because, overwhelmingly, when local issuers want to sell debt. rather than work on it themselves, they buy the services they need.
Then there was the banker who told me, "Why is everyone going negotiated? Why are they selling plain-vanilla general obligation bonds negotiated? The more negotiated the business is, the more corrupt -- it makes the greedy greedier. We know what happens when the Pentagon doesn't take bids: You wind up with $94 hammers."
And finally there was the banker who said, "A strong credit should be rewarded. What we're seeing in the municipal market is an absolute perversion of how markets are supposed to work."
Well, the battle has raged back and forth. In letters and phone calls, in an analyst's report, and even in a speech before the Municipal Forum of New York. the case for and against both kinds of underwriting has been presented. To little avail, as can be seen by the numbers I cited above on actual issuance.
The Smashup
The whole argument now occupies a completely different plane. We are now well beyond academic discourse. The market is heading rapidly toward a smashup, at least of the "This Is How Business Is Done" end of things. Soon the market will have someone else's vision of fairness imposed upon it because, really, of a handful of bankers and politicians who have seen fit to fatten themselves at the public trough.
Gov. Florio of New Jersey has ordered the state and its agencies to sell all debt through competitive bid. Andrew Stein in New York City thinks that might also be a good idea for the city to follow. Several other issuers are thinking the same thing. so anxious are they to avoid the shadow of the New Jersey Bond Scandal of 1993, which at this juncture is beginning to look like the Hindenburg coming toward the docking mast at Lakehurst.
Even The New York Times in the span of two weeks carried a pair of editorials on the bond market: "A Cleanup for New Jersey Bonds" and "Bidding for Bonds Is Cleaner." The Newspaper of Record observes, "Competitive bidding offers the better chance of keeping public finance clean and aboveboard," and "Sealed competitive bidding helps to neutralize the stench of political influence."
What we are seeing now among the politicians and the regulatory agencies is a variety of crisis control and rapid response therapy. And when things are done quickly, they are rarely done well. So it is with the market.
There is a real place for the hip and dip of negotiated underwriting, and it is extremely unwise to prohibit it by fiat, as Gov. Florio has seen fit to do. On the other hand, it is also a little cynical, and a little cute. to see how cheap underwriters bid on a competitive GO sale before bestowing negotiated business, its Georgia decided to do last week.
The truth is that issuers who really care about these kinds of things, issuers who have the expertise on the premises in the form of dedicated finance directors and treasurers and the like, need the flexibility to sell debt as they see fit. Market conditions and debt structures are just two of the factors that will influence those decisions. And that's why negotiated underwriting should be retained as an option that makes sense.
I was, in fact, originally going to call this column, "In Defense of Negotiated Underwriting," but I did not want to cause too many coronary arrests among my banker pals.
Anyhow, it's too late now. Markets do not react according to the Golden Mean, and neither do government regulators, and neither do scared politicians. The weeks and months ahead will be ugly.
