A huddle over market transparency

The SEC held a fixed income roundtable on Tuesday to discuss two important issues: market structure and ways to improve it for municipal and corporate bonds. The SEC has as much authority to regulate this market as it does for equity securities, and it appears to be finally flexing its muscles with a little structure for the $18.7 trillion fixed income market.

I tweeted the roundtable all day (you can read the whole thread here), and I’ve posted the best ones here (parentheses are my editorial comments):



Muniland has a disclosure problem

There is a glaring gap in regulation – called Regulation Fair Disclosure – when it comes to protecting municipal bond investors. It appears that issuers may be in the habit of giving material nonpublic information to preferred institutional investors, while making retail and non-preferred investors sit out in the cold. Exhibit number one is the treatment of media members who have petitioned to attend the City of Philadelphia bond investor day scheduled for this Thursday. The Philadelphia Inquirer wrote:

Several news organizations led by Bloomberg News are protesting the exclusion of the news media from a two-day conference sponsored by the Nutter administration to stimulate investor interest in the city’s municipal bonds.

The Inquirer has joined the protest, signing a letter to Nutter that criticizes the city for refusing to let reporters attend the conference, scheduled to begin Thursday at the Comcast Center.

Are sports scandals a blow for state universities?

The firing of Rutgers basketball coach Mike Rice and the surrounding controversy recalls the governance meltdown at Penn State around the Jerry Sandusky scandal. Moody’s downgraded Penn State over that scandal, which involved serious allegations of child abuse and rape. From

In its report, Moody’s said the primary factor that led to the downgrade is the uncertainty over what Penn State can expect financially from the ultimate cost of future settlements and possible judgments stemming from sexual abuse claims made by Sandusky’s victims. Moody’s report said that the stable outlook reflects expectations that the University will ultimately resolve victims’ claims and that it will continue its work to implement substantial governance reforms.

Moody’s has since placed Rutgers on negative watch. The agency said this today in its Weekly Credit Outlook (subscription required):

How counties lost revenue in the bank foreclosure crisis

In a Senate Banking Committee hearing, newly elected Massachusetts Senator Elizabeth Warren asked why bank regulators protected banks, but would not assist wronged homeowners. Regulators did not have an answer to her question, but there is still another question that needs to be asked: What about the economic damages to county governments from banks using a false mortgage registration system – MERS – to avoid paying mortgage registration fees

What is MERS?

”Mortgage Electronic Registration Systems” (MERS) is a privately held company that operates an electronic registry designed to track servicing rights and ownership of mortgage loans in the United States.

MERS serves as the mortgagee of record for lenders, investors and their loan servicers in the county land records. MERS claims its process eliminates the need to file assignments in the county land records which lowers costs for lenders and consumers by reducing county recording revenues from real estate transfers and provides a central source of information and tracking for mortgage loans.

SEC must look beyond US borders to reform the fixed income markets

The SEC is holding a Fixed Income Roundtable on April 16 to examine ways to improve the transparency and efficiency of the fixed income markets. This is the first time that I am aware of that the SEC has focused exclusively on the market structure of fixed income. Although fixed income as an asset class is over twice the size of the equity market, and the SEC was given authority in 1975 to oversee this market, almost nothing has been done to regulate it.

All US bond trading is done over the counter or through alternative trading systems (ATS), which are trading platforms registered as dealers. ATS do not have responsibility to oversee the conduct of the other dealers trading on their platform. Think of them as fancy eBay systems for dealers to interact with each other. Rule 300(a) of the SEC’s Regulation ATS provides the following legal definition of an “alternative trading system”:

Any organization, association, person, group of persons, or system:

    That constitutes, maintains, or provides a marketplace or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange within the meaning of Rule 3b-16 of this chapter; and That does not:

1      Set rules governing the conduct of subscribers other than the conduct of such subscribers’ trading on such organization, association, person, group of persons, or system; or

How Margaret Thatcher sold the family silver to reform society

The passing of the UK’s former Prime Minister Margaret Thatcher has brought the issue of her work privatizing public assets to the surface. When she began her efforts, her country was in desperate need of revenue. However, there were deeper reasons for her privatization binge. From the

Mrs. Thatcher embraced it initially as a way to reduce public debt after the 1980-81 recession. It was only when the £4bn flotation of British Telecom in 1984 proved hugely successful – with the offer almost 10 times subscribed – that she seized on its political possibilities for rolling back socialism.

In 1987 came the flotations of British Airways, Rolls-Royce and British Airports Authority, followed later by steel (which had been renationalised by Labour in the 1960s), water and electricity. John Major’s government sold off the remains of the coal industry and the railways.

Will Wisconsin’s merit pay for public employees change the system?

In a wildly contentious move in 2011, the Wisconsin legislature voted to end union rights for public workers. Those union rights established pay rates and employment conditions via collective bargaining agreements for most government workers. The new law also ended the deduction for union dues from employee salaries. The Wisconsin State Journal reports how merit raises have replaced automatic annual pay raises:

In the first round of pay increases for Wisconsin state employees since union contracts were invalidated, supervisors delivered an average 6.52 percent boost to 2,757 workers, roughly one in 14 of those eligible.

The payout — totaling $8.2 million — is very different from union-era raises, which were much smaller on a percentage basis but cost tens of millions more because they were distributed to most non-academic employees.

Pain for Stockton taxpayers

After proving it was insolvent, the city of Stockton, California entered the municipal bankruptcy process last week. The judge hasn’t yet delivered his formal ruling, but here are some of the most relevant reasons for the city’s insolvency, according to Judge Christopher Klein (page 556 most of which you have read here at MuniLand over the past year):

Excessive public employee compensation levels:

Some of the problems were also the incrustation of a multi-decade, largely invisible or non-transparent pattern of above-market compensation for public employees. Among other things, the City offered generous health care benefits, to which employees did not contribute. Retirees had their entire health bills paid for by the City. The City permitted, to an unusual degree, so-called “Add Pays” for various jobs that allowed nominal salaries to be increased to totals greater than those prevailing for other municipalities.

The enormous explosion of retirement liabilities:

Some of the problems were also rooted in generous retirement practices. The pensions, of course, are themselves a form of implicit compensation. Pensions were allowed to be based on the final year of compensation, and only the final year of compensation, and that compensation could include essentially an unlimited accrued vacation and sick leave. So it was possible to engage in the phenomenon that’s become known as ‘pension spiking,’ in which a pension can wind up being substantially greater than the annual salary that the retiree ever had.

Moderating the infrastructure debate

New York’s mayor Michael Bloomberg has a reputation as a data junkie who uses statistics to manage the city more efficiently. I think I found his doppelganger in Michigan’s governor Rick Snyder. Fitch recently bumped Michigan’s rating to AA from AA-, where it had been since 2007. Bloomberg and Snyder may be national models for the effective use of data at the local, state and federal levels.

I learned about Snyder’s efforts while watching a Council of State Government’s webinar about the American Society of Civil Engineer’s 2013 report on the condition of America’s infrastructure. The report has been panned by many, including Reuters’ Jack Shafer, who says that the proposed spending is just an enormous meal ticket for the nation’s civil engineers and construction firms. The Director of Michigan’s Department of Transportation, Kirk Steudle, used two arguments to rebut Shafer:

1) Most civil engineers are public employees who don’t benefit from an increase in infrastructure spending. In fact, they would be paid the same if they managed three or six projects.

A bad track record for privatizing infrastructure

The poster boy for privatizing U.S. public infrastructure has been Virginia’s governor Bob McDonnell. I wrote last June about McDonnell:

Governor Bob McDonnell might as well have put a for-sale sign on Virginia’s front lawn when he announced that the state’s Office of Transportation Public-Private Partnerships (OTP3) has a ‘pipeline’ of potential privatization projects. The governor and Sean Connaughton, the head of the Department of Transportation, appear to be racing to move as many of Virginia’s public assets into private hands as possible.

How was McDonnell doing this? The Bond Buyer had the story:

In a move that is likely to make Virginia the leading state for public-private partnerships, Gov. Robert McDonnell has announced 22 transportation and infrastructure projects that may be developed as P3s.

  • # Editors & Key Contributors