The SEC’s Office of Compliance Inspections and Examinations, muniland’s uber-regulator, issued a “Risk Alert” yesterday directed at underwriters of municipal bond offerings. The alert basically said: If you offer new bonds for sale, you must perform due diligence on the issuer. And you better document what you did.
Although credit rating downgrades for municipal bonds are grabbing the headlines, that is not a real worry for Wall Street. Underwriters and traders are used to adjusting their models and formulas for changes in ratings and interest rates; after all, they are extremely skilled at that. However, forces are taking aim at the way they are compensated, and that is Wall Street’s deepest muniland fear. It’s all about how they are paid to underwrite municipal bonds, and the state of Maine is leading the charge.