The reformation of the municipal bond market has begun.
Until last week, real change in the municipal market seemed unlikely beyond a few cosmetic regulations. But after last week's nonstop activity, campaign contributions have been checked and may very well be under control. And now, municipal investors may eventually receive the same information that corporate bond investors are given.
Just how the municipal market will ultimately be reformed is impossible to say, but reform is moving faster than participants realize. Last Monday, 17 major municipal bond underwriters agreed voluntarily to bar campaign contributions. On Tuesday, Lazard Freres & Co. released its code of conduct banning all business-related political contributions, a code that Arthur Levitt, chairman of the Securities and Exchange Commission, called "pretty terrific."
Also on Tuesday, the SEC's staff held talks in Washington with some two dozen people from various parts of the municipal bond industry to begin developing standards for secondary market disclosure. Levitt on Oct. 14 told about 40 muni market leaders that they had 90 days to agree on a plan to improve ongoing disclosure by municipal bond issuers.
In another action Tuesday, treasurers of Western states met in Coronado, Calif., and adopted a resolution calling for fundamental campaign finance reform, not just for treasurers but for officeholders at all levels of government. The Western treasurers specifically commended Kathleen Brown, treasurer of California, for her recent decision not to accept contributions from anyone participating in bond financing. They also pointedly said that campaign finance at the federal level needed reform as much as it did at the state and local level.
All this activity comes not a moment too soon. With almost $300 billion of municipal bonds coming to market this year and with $1.2 trillion of municipal bonds outstanding, this vast marketplace must maintain the public's confidence. It cannot endure and prosper if investors believe underwriters are chosen on the basis of their campaign contributions, not on their ability to raise capital at the lowest possible cost. Nor can it prosper if investors are not assured the information they need to make rational decisions about their holdings in the future.
As Levitt remarked during a visit to The Bond Buyer last Tuesday, "This market is supposed to be the safest of the safe." It cannot be perceived "as a payoff business," he declared.
Much is happening quickly, and all of it is good for the municipal bond market, as far as we can see.
