Matt Taibbi’s latest piece for Rolling Stone, “How Banks Cheat Taxpayers,” blasts a common municipal bond market practice in which a state or municipality selects an underwriter for an offering without soliciting competitive bids for the project. These are called “negotiated bond offerings” in muniland parlance, and Taibbi likens them to a legalized form of bribery:
By “negotiated underwriting,” what Bloomberg means is, “local governments just hand the bid over to the bank that tosses enough combined hard and soft money at the right politicians.”
I really hope that Taibbi’s is making a hyperbolic statement to draw attention to his main premise that new bond offerings should done on a competitive basis, with which I agree entirely. But he implies that all state and local politicians are standing around with their hands out and are actively being bribed by Wall Street banks. If our country is that corrupt, we are in for a lot of trouble.
In contrast to Taibbi’s view I think most public officials are overwhelmed by the complexity of the municipal bond markets, which are hard to understand, and rely on a “trusted” investment banker to guide them through the minefields. A great report from Claire McCaskill, who served as the Missouri State Auditor in 2005 and now represents the state in the U.S. Senate, contained the following:
Some issuers [local governments] used questionable reasons in choosing negotiated sales. In addition, officials contacted believed they achieved low interest rates on negotiated sales because underwriters offered rates below the national bond index. However, due to Missouri’s high credit rating, the majority of general obligation bonds issued in the state achieve rates below the national index.