Episode Transcript:  Joe Fichera Part II

Johan– Let's talk about the VRDN market.  Just to summarize a couple of points you've made.  You think we should look at the VRDN market, it should continue to exist for some big borrowers.  Simpler structures should be the structures that we present to our smaller borrowers.  Generally speaking is the VRD market, should it continue?

Joe–Absolutely.  The VRDN market is an important part of playing the yield curve and for people who can take risk and volatility and have strong cashflows and can manage that, should take advantage of that.  I believe for example, one of my clients was Exxon Corporation; all of their tax-exempt debt is in the variable rate short-term mode.  Why? Because that has presented them, and historically will always be lower, than the fixed rates associated with it.  They’re a strong credit.

Johan– Let's talk a little bit about the federal backstop, it's a viable short term solution but it may be fraught with danger, that the Fed could become a permanent fixture, people become accustomed to it.  It's reasonable and customary that the Fed provide this function after it already has. 

Joe–I think the Chairman was pretty clear that he doesn't think it's a Fed issue, that it may be a federal government's issue.  I read Bernanke's letter basically saying, “It's not my problem, go talk to the Congress.”  I do think the notion of always looking to somebody else to solve your problem is a problem in itself.  And looking to a federal government solution and how it will work, it can become a slippery slope.  It creates a tension between saying the state and local governments are sovereigns and therefore the federal government should not tax our obligations and therefore that's where we take advantage of tax-exempt financings.  But now we go and say we're sovereigns but we'd like the government to guarantee our financing but not tax our obligations.  So you might just find yourself in a very difficult position.  If we're going to be sovereigns they should be able to develop mechanisms, and the market can, in terms of bring those lower rated credits, or Congress could provide incentives for banks to make direct loans to smaller entities, and do other types of things, or to facilitate in making the subsidy better for the private sector.  But I'm much more interested in private sector solutions than the federal government solutions.  In just thinking it through, who's going to make the decisions?  Make sure we keep politics out of it, one state versus another?  It's a slippery slope into a much more difficult area, though we've all become sort of “bailout nation” right now and I think we need to step back and take a deep breath and see if private sector or other parts can do it with some subsidies and some temporary support, but not looking to the federal government for the answer for everything.

Johan– You've pointed out some of the issues here but there's talk about this and people are waiting for it with baited breath that some kind of federal backstop for the floating rate market is going to arrive so aside from your concerns here about the implications, do you think it's going to happen anyhow?

Joe–I think that there will be some federal action to help the municipal market.  I think the pressure is there but I think also there's going to be some very strong pressure about reforming the entire municipal market in terms of its disclosure requirements, the role perhaps of the SEC, the role of other regulators to bring some harmony to the capital markets.  The unique aspect of the market in the United States of a state and local sub-sovereign market that is pretty much independent.  Regulated very indirectly and very loosely.  Then we find some systemic risks popping up like the auction rate securities issue.  That was on no ones’ radar screen.  Who would have thought $160 billion of investors would get frozen in that market?  For no real apparent reason.  Nobody's really been able to explain how in the second week in February, what was the news event that occurred or what caused that.  I think there's going to be clearly reform issues.  I would hope that it's not going to be piecemeal and I think that if there's going to relief from the federal government there's also going to unfortunately be some more regulation and then state and local officials are going to have to decide that on terms of the trade offs between the two, in terms of what kind of relief they want to get and what kind of regulation that they're going to have to accept that comes.  Or whether they can do something on their own to make sure that the market is functioning more efficiently.  It is an outrageous statistic to realize that over 50% of the issuers that were supposed to file continuing disclosures documents about their financial condition, didn't do it. 

Johan– That is outrageous. 

Joe–You just think that on the one hand you don't do that.  You just don't even keep people informed.  And on the other hand you're arguing that you want help.  And you want these various things.  You know, you're going to have to accept some more responsibility.  We're going to have to get our acts together here.  The other idea that the more rigorous disclosure or more common disclosure, needs to be a benefit-cost test, we need to demonstrate that an issuer will benefit before they improve their disclosure.  That sort of needs to be put aside.  Market integrity issues are not supposed to be subject to a benefit-cost test.  They are market integrity.  They are fundamental, they are principals.  It's not I will tell you all about me only if you tell me that it's going to save me money, I will tell you the truth.  You're going to tell the truth because that's the way we need the market to function is with disclosure, transparency, data, letting people make decisions based on facts. 

Johan– Do you think the House of Representative and the Senate are on the right track right now with the dialogue that's going on with respect to the regulation of the market on that level?  And then there's all this talk of the MSRB folding into the SEC and then the MSRB is showing a lot of renewed vigor here to create and enforce regulation on the market.  Are we having the right kind of dialogue on that right now?

Joe–I think we're beginning the right dialogue.  I look at Arthur Levitt is trying to bring more of it in plain English and common sense and the fact that the Municipal Market Advisors has finally come out and said they think that they need to have the MSRB folded into the SEC and that self-regulation isn't working.  I think the issues are starting to be raised.  I think we're distracted by some of the pay-to-play and other types of issues.  It's really more of an issue of the professionalism and integrity of the market and the risks and investors.  This is a large market.  It has a big retail component and the Mom and Pop investor deserves to have that information.  But more importantly I think the ultimate reform for this market, where we should be going, is to create in this day and age of high technology, a national municipal market, a “Municipal Exchange” where people can trade and bid more freely and increase the liquidity in this market.  If E-bay can sell things from your garage, effectively nationwide, if the baby on the E-trade commercials at 11:00 at night can trade a $2 stock in Hong Kong, why can't we make a system where people can trade "AA" municipal bonds?  Even the toxic auction rates, why wouldn't we be able to get these things out?  What is holding this back?

Johan– Brokerage houses.

Joe– Well that's why I think maybe perhaps an Exchange that we combine electronic technology with brokers becoming part of an Exchange so they could all share and we can create liquidity and we can create transparency.  Because right now we've clearly seen that concentrating on the money-center banks and the big banks, “They'll always be there, I don't need to worry, I have Lehman Brothers,” has not exactly worked out the way we thought it would.  What really perhaps what we need to do, let's go back to broad syndications where broker dealers of all sorts and sizes are parts of the syndicates not just five or six, thirty or forty.  Morgan Stanley, in the early 1970s was the number one lead manager of corporate securities in the country.  They had 200 employees.  How did they do it?  They managed syndicates.  And that's what we need to do.  You go back to broader syndication and rather than what we did when the concentration of capital and buying deals and such, but putting in broad syndicates and using today's technology to bring the transparency.  You should be able to see the deals on the screen, live, when they're happening.  You can put bids in.  You can do that on a stock, why can't you do that on a bond?  Again, let's use today's technology to bring disclosure, bring transparency, bring liquidity, let people make their own decisions.  The markets can work!

DerivActiv MuniMarket Pulse with Johan Rosenberg is brought to you by: Sound Capital Management.  Debt and derivative advisors for the tax-exempt market.  Find out more at www.soundcapital.com.  Copyright © 2008 DerivActiv, LLC.