Journal Calls For Muni Bond Reform

Having followed the muni-bond scandal across this nation I heartily concur that some reforms are needed. Just the other day CDR and its associates won a victory in court, so reform is needed now more then ever. as of now the market has experienced trouble, and with Obama's change in the tax code we can expect even more action in the muni-bond market.

The Reforms:

There should also be a "plain English" standard on disclosures and other documents so investors and issuers understand their risks and responsibilities. Those documents should be distributed on a system at least as fast and searchable as the SEC's EDGAR database, and should be updated when any material information arises. Failure to file disclosure documents on time should carry a meaningful penalty to issuers, many of whom now routinely fail to file on time or at all.

And though it would be unpopular with elected officials, the chief executive officer and chief financial officers of public-sector entities -- including mayors, county chairs and governors -- should personally certify the accuracy of the information in offering documents and subsequent disclosures. Likewise, CFOs of issuers should certify they have done a thorough and independent analysis of their proposed transactions and not just defer to the views of underwriters, ratings agencies and other intermediaries who are usually conflicted.

Time and Time again we have seen how local officials were awed into signing off on deals that they simply didn't understand. here is a quote that is emblematic of the problem and its from a CDR Financial deal in Arkansas that went sour:

Justice of the Peace Patricia Dicker said she was dubious of the lease to purchase program from the beginning. Dicker was the only quorum court member to speak against the bond sale when it was proposed in mid 2001.
"Sometimes when things sound too good to be true they are" she said "But everyone was gung-ho and enthusiastic about helping poor people buy homes, I thought maybe I was stupid, so I went along with it."
This has turned out to be a real rotten deal, at least were not in the dark anymore."

She is not alone, here is a quote about a similar deal by a different firm in Tennessee:

In January, local officials were shocked to discover that annual interest payments on the bond had quadrupled to $1 million. Morgan Keegan, they said, did not serve them well in any of its roles.“We’re little,” Mr. Phillips said, “and we depend on people wiser than us in financial ways to keep us informed, tell us what things mean, and I really didn’t think we got that.

In January, local officials were shocked to discover that annual interest payments on the bond had quadrupled to $1 million. Morgan Keegan, they said, did not serve them well in any of its roles.

“We’re little,” Mr. Phillips said, “and we depend on people wiser than us in financial ways to keep us informed, tell us what things mean, and I really didn’t think we got that.

Depend on wiser people,, as you say. Anyway its not just "innocent: local politicians abused by evil companies. In many cases the politicians are thick as thieves with the companies as the Journal points out:

Conflicts in the municipal market often arise from pay-to-play practices that are widespread. As SEC chairman in the 1990s, I routinely called for an end to pay-to-play. Half-measures were taken and underwriters are now subject to SEC rules. But the lawyers, advisers and asset managers who routinely interact with issuers continue to win municipal-bond business by employing politicians' friends, donating to bond campaigns, contributing to charities, or picking up the check for entertainment. Banning such payments is a good start. Simply requiring that all lawyers, advisers and underwriters disclose all payments received from working on bond transactions -- as well as their political and charitable contributions -- would go a long way.

Here is a quick summary of what they mean:

Another aspect of pay for play, and one more likely to land a politician in jail is CDR's tactic of finding friends, fundraisers and associates of elected Democrats, and hiring them as "Consultants". In New Mexico it was Richardson friend Mike Stratton who was hired by CDR. On a side note the Director of Si Se Puede Fred Duval was hired by UBS ,a Swiss bank, as a consultant. UBS was also one of several banks that ended up receiving a cut of the GRIP pie. The collusion of CDR, elected Democrat, and consultants that occurred in New Mexico is similar to other CDR linked scandals. In Philadelphia it was Ron White (now deceased) who received money and super bowl tickets from the company and was hired as a consultant. He was also an associate and fundraiser for Philly Mayor Sharpe. In Pennsylvania as a whole it was Alan Kessler who was the chief lobbyist for CDR and a top fundraiser for Ed Rendell. The most egregious example would be Mayor Larry Langford of Birmingham Alabama, who is accused in a 101 count indictment of using his friend William Blount and lobbyist Albert LaPierre to funnel money, jewelry, cloths, and watches into his hands in exchange for government favors while he was President of the Jefferson County Commission. Jefferson County, which includes Birmingham is on the precipice of the greatest municipal bankruptcy in history. There are also questions of CDR's actions in Atlanta and several of municipalities and CDR is currently being sued by over 20 school districts and cities in addition to the criminal investigations.

In short, better understanding of the products being marketed along with less inappropriate relationships between government officials and the companies hawking muni-bond deals. Its too late now for places like Jefferson County, but perhaps future disasters can be averted.