The Muni Market Needs A Clean Sweep

The $1.2 trillion municipal-bond market is booming. Some 50,000 states and localities have issued 1.5 million bonds over the years to finance everything from highways to hospitals. Private investors buy three-quarters of this tax-exempt paper and will probably pick up more now that income-tax hikes, and retroactive ones at that, are here. These investors depend on a fair and efficient market.

That's the rub. With the huge explosion in muni sales (more than $250 billion worth of tax-exempts will be sold in 1993 alone) have come abuses. Campaign contributions to local politicians by some investment bankers and lawyers are casting a shadow on the selection of muni-bond underwriters. Certain politicians appear to be doling out bond business on the basis of cash favors instead of the best bid price.

Information on the health and operations of municipal-bond issuers is also hard to come by. Investors are provided with financial data by the rating agencies when a specific bond issue is initially sold. But there's no easy way for holders and buyers in the secondary market to get updated information, especially for smaller, unrated issuers.

What must be done? A good first step would be more disclosure of political contributions by underwriters and other bond advisers to public officials. The Municipal Securities Rulemaking Board (MSRB), the industry's self-regulatory organization, wants to do just that.

But more is needed: Ban contributions by underwriters to politicians in jurisdictions where the companies do business. Florida adopted such a prohibition in 1991. Last November, industry execs, including Robert E. Rubin, then co-chair of Goldman, Sachs & Co. and now director of President Clinton's National Economic Council, outlined a similar plan.

Better financial information about bond issuers is also a must. States and cities should require issuers to file timely financial statements and disclose information material to their securities in the secondary market. For millions of investors and thousands of localities, the municipal-bond market is, for the most part, reasonably safe. Still, the industry must clean up its own act. The alternative should be obvious: the heavy hand of regulation.

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