Shine The Light On Muni Deals

The Justice Dept. won a criminal verdict on Aug. 9 in a case that has rocked the municipal-bond industry. A jury in Boston found former Lazard Freres & Co. partner Mark S. Ferber guilty of fraud. Ferber, a Democratic political aide turned investment banker, failed to tell state officials that he and Lazard were receiving millions of dollars under the table from Merrill Lynch & Co. to help Merrill secure business. Ferber faces five years in jail for each of the 58 counts on which he was convicted.

The Ferber verdict may deter other would-be Wall Street crooks, but it will not remedy the continuing lack of disclosure in the $1.3 billion muni-bond business. A 1994 rule limits--but does not eliminate--campaign contributions by municipal-bond underwriters. Muni-bond executives still find ways to funnel campaign contributions to government clients. Late last year, the SEC took a giant step forward by implementing rules requiring issuers to disclose new information about their ability to repay. But municipalities and underwriters can still hire politically connected consultants without disclosing their financial interests.

Regulators should not stop now. Stronger disclosure of political activities by underwriters and their consultants is still needed. And more detailed information about the risks of muni bonds should become standard, as it is for corporations. These steps could bring the muni-bond business closer to what it ought to be: an open, competitive market.

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