Saturday, February 05, 2005
Bloomberg: Municipal Bonding on the Sly
Feb. 4 (Bloomberg) -- New York State can't stop gorging on bonds, which means future taxpayers will be gouged.
In a report released this week, Comptroller Alan Hevesi provides details of how he says the state has misused its credit.
``It has increasingly used debt to pay for the operating expenses of State and local government,'' the report says. ``And, rather than carefully planning how borrowed dollars are used, the State actually increased its debt levels during years of budget surpluses.''
The remarkable 115-page report, titled ``New York State's Debt Policy: A Need for Reform,'' unwittingly also shows what Wall Street does best.
Wall Street can sell your state or locality's bonds.
Boy, can it!
New York has $46.8 billion in state-supported debt, according to the report. Of that amount, only $3.8 billion was general obligation debt, backed by the voters. The vast, mysterious network of more than 700 public authorities sold almost $42 billion of the remainder.
``Public authority or backdoor borrowing has grown from 60 percent in 1985 to a troubling 92 percent of the State's debt today,'' the report says. ``Translation: Taxpayers were denied the opportunity to approve or reject $40 billion in outstanding debt.''
Debt Time Bomb
They are on the hook for it, though. New York has the fourth- highest debt per capita, $2,420, behind Connecticut, Massachusetts and Hawaii, according to Moody's Investors Service. That's 2 1/2 times the national average of $944.
Isn't that wonderful? That's what Wall Street can do. Wall Street can teach politicians to set up authorities by the dozen to sell more and more bonds, and keep it all as secret as possible.
Until the debt time bomb blows up, of course. Then, after an insufficient amount of hand wringing, Wall Street will send in a batch of public finance ``experts,'' who can set up boards overseeing the mess -- and, of course, sell an entire new round of financial recovery bonds.
Infinite Variety
New York is hardly alone. Unless you live in the smallest of towns, your locality probably has dozens of authorities empowered to sell a dizzying array of bonds to help finance everything from housing to hospitals to industrial development.
You don't know it, but you are probably on the hook for dozens of different kinds of bonds. You will probably never be able to figure out how most of them work. You will never be able to calculate how much it's costing you to borrow, and how that compares to how much it cost you last time.
A study of the market by the U.S. Securities and Exchange Commission last year put it pretty well, when it concluded that municipal bonds were too complicated for their own good: ``Issuers may be able to raise funds at lower cost by creating simpler bonds.''
Of course, the bankers who design these things will tell you that they custom-design each one with a special buyer in mind, so that you get the lowest borrowing cost.
Satisfying a particular buyer may not translate into the lowest borrowing cost, for one thing. For another, is it such a leap of imagination to think that some bankers wouldn't so complicate a bond that it resists comparison? Because if you can't make a simple comparison of how much it cost you to borrow this time versus last, then the banker is always right. Their handiwork can never be challenged, at least not by the average citizen.
They like it that way.
Wonder of the World
The municipal market, which allows U.S. municipalities to finance their own destinies, is a wonder of the world. It has also become, as Alan Hevesi's report shows, a curse.
Don't blame Wall Street, though. Wall Street sells bonds. It is paid to sell bonds, and that's what it does. Its main ``idea,'' as the Hevesi report demonstrates, is to sell more bonds. If a municipality hires a financial adviser, that adviser isn't going to counsel it against selling bonds. The advice is always going to be ``yes.''
If you want to blame someone for the curse this market has become, blame the politicians, especially those who bought Wall Street's line that all bonds should be sold through negotiation with dealers, rather than at auction. Pols traffic in favoritism and influence, and negotiated finance empowers them. It is no wonder that they have hijacked the entire process, and perverted it.
Morgan Bankers
Those who are concerned with what this market has become should read the interviews conducted with a pair of ex-J.P. Morgan bankers, one of them a managing director, unsealed by a Philadelphia judge last week.
In the course of this astonishing document, the managing director says it is common practice to pay certain people, financial advisers and bond lawyers and the like, who can influence key decision makers, even if they do no work on a particular transaction.
Now, mind you, it was a managing director saying this, one who ran an entire region of the country for the bank. And he worked for J.P. Morgan, one of the top municipal underwriters --not some bucket shop.
His associate said that in large cities, there was a ``go-to guy'' who could be influenced in this way, ``99.9 percent of the time.'' This banker also ``described the public finance process as inherently politicized and dependent upon personal relationships.''
Nobody gets paid unless more bonds are sold. Those looking for what is killing the municipal market and choking the taxpayers with mountains of debt need look no further than the rise of the negotiated sale.
To contact the writer of this column:
Joe Mysak in New York at jmysakjr@bloomberg.net.
To contact the editor responsible for this column:
Bill Ahearn at bahearn@bloomberg.net.
In a report released this week, Comptroller Alan Hevesi provides details of how he says the state has misused its credit.
``It has increasingly used debt to pay for the operating expenses of State and local government,'' the report says. ``And, rather than carefully planning how borrowed dollars are used, the State actually increased its debt levels during years of budget surpluses.''
The remarkable 115-page report, titled ``New York State's Debt Policy: A Need for Reform,'' unwittingly also shows what Wall Street does best.
Wall Street can sell your state or locality's bonds.
Boy, can it!
New York has $46.8 billion in state-supported debt, according to the report. Of that amount, only $3.8 billion was general obligation debt, backed by the voters. The vast, mysterious network of more than 700 public authorities sold almost $42 billion of the remainder.
``Public authority or backdoor borrowing has grown from 60 percent in 1985 to a troubling 92 percent of the State's debt today,'' the report says. ``Translation: Taxpayers were denied the opportunity to approve or reject $40 billion in outstanding debt.''
Debt Time Bomb
They are on the hook for it, though. New York has the fourth- highest debt per capita, $2,420, behind Connecticut, Massachusetts and Hawaii, according to Moody's Investors Service. That's 2 1/2 times the national average of $944.
Isn't that wonderful? That's what Wall Street can do. Wall Street can teach politicians to set up authorities by the dozen to sell more and more bonds, and keep it all as secret as possible.
Until the debt time bomb blows up, of course. Then, after an insufficient amount of hand wringing, Wall Street will send in a batch of public finance ``experts,'' who can set up boards overseeing the mess -- and, of course, sell an entire new round of financial recovery bonds.
Infinite Variety
New York is hardly alone. Unless you live in the smallest of towns, your locality probably has dozens of authorities empowered to sell a dizzying array of bonds to help finance everything from housing to hospitals to industrial development.
You don't know it, but you are probably on the hook for dozens of different kinds of bonds. You will probably never be able to figure out how most of them work. You will never be able to calculate how much it's costing you to borrow, and how that compares to how much it cost you last time.
A study of the market by the U.S. Securities and Exchange Commission last year put it pretty well, when it concluded that municipal bonds were too complicated for their own good: ``Issuers may be able to raise funds at lower cost by creating simpler bonds.''
Of course, the bankers who design these things will tell you that they custom-design each one with a special buyer in mind, so that you get the lowest borrowing cost.
Satisfying a particular buyer may not translate into the lowest borrowing cost, for one thing. For another, is it such a leap of imagination to think that some bankers wouldn't so complicate a bond that it resists comparison? Because if you can't make a simple comparison of how much it cost you to borrow this time versus last, then the banker is always right. Their handiwork can never be challenged, at least not by the average citizen.
They like it that way.
Wonder of the World
The municipal market, which allows U.S. municipalities to finance their own destinies, is a wonder of the world. It has also become, as Alan Hevesi's report shows, a curse.
Don't blame Wall Street, though. Wall Street sells bonds. It is paid to sell bonds, and that's what it does. Its main ``idea,'' as the Hevesi report demonstrates, is to sell more bonds. If a municipality hires a financial adviser, that adviser isn't going to counsel it against selling bonds. The advice is always going to be ``yes.''
If you want to blame someone for the curse this market has become, blame the politicians, especially those who bought Wall Street's line that all bonds should be sold through negotiation with dealers, rather than at auction. Pols traffic in favoritism and influence, and negotiated finance empowers them. It is no wonder that they have hijacked the entire process, and perverted it.
Morgan Bankers
Those who are concerned with what this market has become should read the interviews conducted with a pair of ex-J.P. Morgan bankers, one of them a managing director, unsealed by a Philadelphia judge last week.
In the course of this astonishing document, the managing director says it is common practice to pay certain people, financial advisers and bond lawyers and the like, who can influence key decision makers, even if they do no work on a particular transaction.
Now, mind you, it was a managing director saying this, one who ran an entire region of the country for the bank. And he worked for J.P. Morgan, one of the top municipal underwriters --not some bucket shop.
His associate said that in large cities, there was a ``go-to guy'' who could be influenced in this way, ``99.9 percent of the time.'' This banker also ``described the public finance process as inherently politicized and dependent upon personal relationships.''
Nobody gets paid unless more bonds are sold. Those looking for what is killing the municipal market and choking the taxpayers with mountains of debt need look no further than the rise of the negotiated sale.
To contact the writer of this column:
Joe Mysak in New York at jmysakjr@bloomberg.net.
To contact the editor responsible for this column:
Bill Ahearn at bahearn@bloomberg.net.
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