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“Too big to fails” in the muni markets…

America’s largest banks are the prime underwriters of muni debt and swaps… this area of the market has been a particularly abusive part of Wall Street.

Their behavior against municipalities is a charge against them in the discussion of whether they should be broken up.

There are many stories of predatory behavior towards municipal officials… muni swaps are central to significant problems for Tennessee, Pennsylvania, Alabama and New Jersey… and we can expect more states and municipalities to come forward with fiscal tales of woe that involve muni swaps…

Wall Street saw the hayseeds and said “ripe pickings”… the lack of oversight of fiduciary standards by the Municipal Standards Rulemaking Board should be examined… a recent story about muni swaps in New Jersey highlighted that they were sold to a municipality by a board member of the Municipal Standards Rulemaking Board :

Bloomberg reports:

~~~ “… New Jersey taxpayers are sending almost $1 million a month to a partnership run by Goldman Sachs Group Inc. for protection against rising interest costs on bonds that the state redeemed more than a year ago

…Goldman Sachs is working with officials to make adjustments in light of “changes in market conditions that have made the transaction less attractive,” spokesman Michael DuVally said in an e-mail.The economics and risks involved in this transaction were fully understood when the authority decided to enter into this swap six years ago

… Kevin Willens, a managing director of Goldman [Sachs] and currently a director of the MSRB, which sets standards for banks and securities firms in the $2.8 trillion municipal market, presented the swaps proposal on the bank’s behalf, authority minutes show.

Charts “described the success rates of swaps,” according to the minutes. Willens was not an MSRB director at the time…”

“Risks involved in this transaction were fully understood when the authority decided to enter into this swap six years ago”… really?

And “negotiated underwritings”… they are as abusive of municipalities and are a form of “municipal capture“…

From Bloomberg:

~~~ “More than 85 percent of the $308.9 billion in new tax- exempt bond issues this year were sold without competitive bidding, according to data compiled by Bloomberg. Such negotiated issues, for which borrowing costs are set privately, show how public officials do financing in the dark in the $2.8 trillion municipal bond market.

No-bid sales made up 68 percent of new bonds in 1982 and 17 percent in 1970, according to the U.S. Government Accountability Office.

Same Underwriter

In the absence of competition, some local government borrowers including Oregon school districts, Hawaii counties, and Missouri municipalities have used the same underwriter for years, public records show. Beaver County relied on Commonwealth Securities to manage all but one of its bond issues since at least 1986, according to county records and transaction documents.

Finance professionals say no-bid sales allow them to market debt to particular investors, helping borrowers fulfill their needs when credit markets aren’t accommodating.  Such assertions are belied by data showing that when negotiated sales are combined with persistent use of the same underwriter, issuers’ borrowing costs increase by 5.3 basis points for each sale, according to a study published in the Winter 2008 edition of the Municipal Finance Journal. A basis point is one one-hundreth of a basis point.

That sort of increase on $100 million worth of 10-year bonds would add up to $1 million in higher costs for an issuer that had used the same underwriter twice previously, according to the research by Mark D. Robbins and William Simonsen of the University of Connecticut in Storrs...”

Big Wall Street banks and their “bank holding company” brethren have made substantial profits in the “dark” municipal markets… these are the “too big to fail” institutions… it’s very ironic that taxpayers were on the hook for these banks… not just in the TARP bailout either… but through the payments for swaps and higher underwriting fees… this condition contributes to over concentration in our financial markets…

Less concentration… more stability…

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