Felix Salmon

Adventures in muni league tables

By Felix Salmon
August 20, 2009

JP Morgan is making a big push into the muni market, by throwing its balance sheet around. It’s lending $1.5 billion to California, in return for getting the mandate to sell $10.5 billion of “revenue anticipation notes” next month; it also provided billions of dollars in support for Illinois, last November, and New Jersey, in June. “We are trying to build up our municipal franchise,” JPM’s Jeff Bosland told Michael Corkery. “With a state the size of California, we have the capability to help on a big scale. People tend to remember you when you were there for them in tough times.”

So, how is JP Morgan doing in those municipal-bond league tables? In the first half of this year, it’s in third place, having underwritten $22.6 billion in munis for an 11.6% market share. The leader, Citigroup, underwrote $31.6 billion in bonds, while Bank of America is in second place on $26.8 billion.

It’s worth comparing that position to the state of affairs in 2007, before JP Morgan bought Bear Stearns. For the full year, JP Morgan was in 5th place with $25.6 billion and a 6.0% market share, while Bear was in 8th place with $24.6 billion and a 5.8% market share. Add the two together (there might be a tiny bit of double-counting on issues they co-ran, but I doubt it would make much difference) and you get $50.2 billion, which would have been good for a comfortable second place, behind Citigroup. On the other hand, if you add together the 2007 deals of Bank of America and Merrill Lynch you get to a whopping $65 billion, good for first place, ahead of Citigroup.

One might think that with its two major competitors — Citigroup and BofA — both hobbled by government supervision, JP Morgan would be taking the opportunity to carve out a true leadership position in the municipal bond market. But in fact Citi seems to be doing very well indeed in that market, while BofA is very much holding its own. Maybe municipal finance is something federal regulators positively encourage, or maybe integrating the Bear Stearns team with the JP Morgan team was non-trivial. But in any case competition in this market doesn’t seem to have gone away, even with the consolidation of Merrill and Bear, and the fact that the #3 player in 2007 (UBS) has disappeared from the line-up entirely.

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Not to take anything away from JPM’s generous actions, but the stimulus bill enacted in February has a little noticed provision that results in very attractive after tax returns for banks that earn interest on loans or bonds from state and local governments. (It permits banks to earn tax-exempt interest and lose only 20% of the associated interest expense deduction; before the legislation, the disallowance was 100%.) Also, when JPM took over Bear, they got rid of almost everyone from Bear’s municipal department.

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