To follow up on the post regarding the NYT article on municipal bond issues, I did a little poking around.
From the NYT article:
The risks of the transactions were, in fact, on the minds of members of the Tennessee legislature in 1999, when they passed a law requiring a municipality to follow several procedures before receiving authorization from the comptroller to enter a swap agreement.
Even with those regulations, the comptroller approved all 215 swap applications submitted in the state since 2001. “Tennessee was an unwitting conspirator in this whole mess,” said Emily Evans, a Nashville City Council member and former bond trader who was a critic of her city’s swap deal on the bond for the Tennessee Titans’ stadium.
One of the most important provisions of Tennessee’s law was education. In 2000, the state comptroller at the time, John G. Morgan, appointed nine government and industry representatives to establish guidelines for derivatives and devise a curriculum for the swap school. The panel included two lawyers from Bass, Berry & Sims and a Morgan Keegan banker.
Mr. Morgan said he had asked business professors to teach the course, but they had declined. “So the job was left for the people who know the most about these intricate transactions — the people in the business,” he said. “I didn’t think there was a problem.”
I don't know if characterizing the state's role as "unwitting" quite covers it. "Witless" might be more accurate.
Read the client roster at Bass Berry & Sims. Smack in the middle of the L-P list is this entry: Morgan Keegan & Company, Inc.
So, this is the upshot: The state appointed the company that was selling municipalities on the vehicle of derivative bonds to "educate" them about these products. Can you say "conflict of interest?" The state also appointed the firm that would (a) write the bond issues on behalf of the company that was selling the munis on the bonds, and (b) held a client relationship with Morgan Keegan. Bass Berry & Sims had a two-way financial stake here. Can you say "conflict of interest?" And the state gives the imprimatur of the state seal on the curriculum, thereby giving the signal that they endorse the products being sold.
In addition, Bass Berry & Sims has a practice specialty in "government advocacy." Read: Lobbying.
In addition, the firm appears regularly in support of clients’ interests before Tennessee’s:
- Environmental regulators on enforcement, licensure and rule-making matters
- Department of Revenue on state and local tax disputes and assessment appeals
- Banking and other regulators in the Department of Financial Institutions
- Insurance regulators in the Department of Commerce and Insurance on licensure and rate-setting matters
- Professional regulatory boards in the Department of Commerce and Insurance
- Department of Health on healthcare licensure and regulatory matters
- Securities Division of the Department of Commerce and Insurance
- Occupational and Safety Administration and other labor and employment regulators
- Attorney General investigations and inquiries
- Public utility commission, the Tennessee Regulatory Authority
Appearance of impropriety, anyone?
I'd have to say that no one was looking out for the munis best interest here. What an epic failure.
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