Ex-SEC Chairman Levitt says muni bonds dangerously opaque - calls for more oversight

Former chairman of the Securities and Exchange Commission, Arthur Levitt says that America's municipal ('muni') bond needs reform along with private sector bond trading. Muni bonds are more susceptible to default, he says, than commercial bonds because of their greater "opacity" and the lack of consistent and enforced standards.

The toll industry in the US, since it is mostly state owned, swims mostly in these murky waters of the muni markets. Fines have recently been levied against muni bond brokers who described them as "safe" investments.

Pay-to-play scandals are apparently persistent, deeply embedded, and widespread.

A number of US toll authorities produce appalling financial reports and - even more appalling - they manage to get big name auditing firms to sign off on them.  (This is an editorial comment! TOLLROADSnews)

Most authorities obscure the basis for their calculations of depreciation, a huge item in a capital intensive business, so it is difficult to know if they are adequately reporting. Almost all toll authorities manage to avoid reporting the classic accounting "bottom line" - whether the operation made a profit or a loss.  (End editorial comment.)

Levitt calls for repeal of the Tower Amendment, a lobbyist driven change in US law going back to 1975 which exempts the muni market from supervision by the Securities and Exchange Commission (SEC).

"Reform should require that municipal-bond issuers follow effective and consistent accounting standards issued by an independent board backed by SEC jurisdiction and enforcement. All relevant disclosure requirements that apply to the corporate bond market should also apply to the municipal market," writes Levitt.

"A review of disclosure rules would also include a review of whether ratings agencies actually bring rigor, transparency and uniformity to the process of assigning ratings to municipal securities. Currently, the Governmental Accounting Standards Board issues accounting guidelines, but the board isn't independently funded and doesn't have the power to enforce its own standards.

"There should also be a 'plain English' standard on disclosures and other documents so investors and issuers understand their risks and responsibilities. Those documents should be distributed on a system at least as fast and searchable as the SEC's EDGAR database, and should be updated when any material information arises.

"Failure to file disclosure documents on time should carry a meaningful penalty to issuers, many of whom now routinely fail to file on time or at all."

Levitt calls for the chief executives and chief financial officers to personally certify the accuracy of information in offering documents and other official disclosures. CFOs should be required to certify that hey personally have done a thorough and independent analysis of proposed transactions, Levitt says, instead of hiding behind underwriters, rating agencies and other (traffic and revenue?) consultants.

"Issuers should require written certification from underwriters and financial advisers that the recommendations and information they present are accurate, reliable and consistent with high financial principles -- not just 'market conventions,' which merely institutionalize the status quo. The magnitude of risks should be calculated and fully disclosed."

These intermediaries are usually "conflicted" Levitt notes - meaning that their employment and pay is heavily dependent on attesting to the validity of proposals made by senior authority officers.

"(T)he lawyers, advisers and asset managers who routinely interact with (muni bond) issuers continue to win municipal-bond business by employing politicians' friends, donating to bond campaigns, contributing to charities, or picking up the check for entertainment."

The greatest need, Levitt says, is to extend SEC coverage to the muni market. A third of the investors in muni bonds are small investors, who need SEC protection.

see http://online.wsj.com/article/SB124182780923802551.html

TOLLROADSnews 2009-05-10