New NABL Chief Eyes Ongoing Crisis

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CHICAGO - As the municipal market grapples with the largest reordering of the financial markets in history, the National Association of Bond Lawyers plans to work closely with its members in the coming days to help sort out the numerous unanswered questions facing their clients, William Holby, who took over as NABL's new president last night, said in an interview this week.

Holby, a partner at King & Spalding LLP in Atlanta, said he expects NABL will keep a watchful eye on the municipal market-related developments stemming from the financial crisis during the group's Bond Attorneys Workshop, which began here yesterday.

In addition, NABL is planning in the coming days to hold a teleconference to discuss the crisis, modeled on a discussion the group held in early March on the tax and securities implications of the collapse of the auction-rate securities market. NABL is recruiting members to participate in the call.

"To the extent we weren't already, NABL's members will now most definitely be entering uncharted waters," Holby said. "We have lost three of the most respected investment banking firms in the world - Bear Stearns & Co., Merrill Lynch & Co., and Lehman Brothers. The rate of bank failures in the country is the highest in recent memory."

Holby noted that the latest casualty appears to be one of the large insurers American International Group Inc. The Federal Reserve Board announced a federal bailout of AIG late Tuesday, a development that Holby said "reinforces the sense that there is no playbook here."

"The government seems to be assessing each situation on an ad hoc basis, making far-reaching decisions based on its best understanding of the likely impact on the overall market," he said. "Given the magnitude of these companies, and the potential ripple effect on the U.S. and world economies, this must be a nightmare for them."

Some of the unanswered questions revolve around Lehman Brothers' filing for bankruptcy protection Monday, the largest bankruptcy filing in history. Though the British bank Barclays PLC has agreed to buy the broker-dealer arm of Lehman, that development only adds to the mix of issues that may take weeks to sort out, Holby said.

Regarding Lehman, there are some "pretty basic" questions about what happens to the variable-rate demand bonds on which Lehman has served as the remarketing agent, Holby said. "Who will step in and take those on, and what happens in the meantime?" he asked.

There are also numerous issues revolving around Lehman's role as a swap counterparty that are much more complicated. Noting that Lehman subsidiaries remain open for business, Holby said NABL members will have to assess which Lehman entity served as the counterparty on their clients' swaps, as well as the implications of the parent company's bankruptcy on those contractual obligations. Because Barclays has said it will only purchase Lehman's trading and investment banking businesses, and not its derivatives business, market participants are unlikely to arrive at easy answers to these questions, he said.

Attorneys will also have to closely examine the tax implications with respect to any swap termination payments made by their clients, after which they will need to evaluate what, if any, new disclosure obligations will arise as a result.

"I'm sure this is only beginning to scratch the surface," Holby said. "It is too early to really get our arms around all of this, but there will unquestionably be a lot of attention on this in the coming days and weeks."

While the market continues to digest the latest developments, Holby said it is important not to lose sight of some key concerns, chief among them that muni issuers rely heavily on commercial banks for credit and liquidity support.

"Given the absence of readily available credit sources, banks will likely be much more conservative about extending credit, and the pricing is likely to reflect the diminished supply," he said.

Meanwhile, Holby said NABL plans over the coming year to actively address the expected changes to the securities law that will revolve around the municipal market initiatives unveiled last year by Securities and Exchange Commission chairman Christopher Cox.

Cox has said he would continue to push Congress to make municipal disclosure more like corporate disclosure, as outlined in a white paper the SEC issued in 2007. It argued the municipal disclosure regime is stale and outmoded in light of the growth in size and sophistication of the market since the disclosure rules were written more than 14 years ago.

Cox was scheduled to testify about the muni initiatives at a House Financial Services Committee hearing on Tuesday, but the panel instead decided to focus on the financial crisis that day. Though it is unclear if the committee will have time to reschedule the hearing if it goes into recess as planned on Sept. 26, Cox has said the SEC will soon consider proposing rule changes to move forward with as many of the initiatives as possible that be accomplished without legislation.

Asked about Cox's proposals, Holby said he believes that the market's existing disclosure regime is in need of some fine tuning, but not radical changes.

"It may be unfair to say that the disclosure process is broken," he said. "It's just a step-by-step, evolutionary process."

EMMA

Since Cox unveiled his initiatives last summer, only one is moving forward - the establishment of a central repository called Electronic Municipal Market Access, or EMMA, that will serve as the municipal equivalent to the SEC's Edgar system.

Holby said that EMMA is a "significant step forward" and an improvement on the Central Post Office, a one-stop filing center that began operating in 2004 and was, in turn, an improvement to the system of four nationally recognized municipal securities information repositories, or NRMSIRs, that the SEC established in the 1990s to collect secondary market disclosure documents.

"This is an evolution, and it takes time," he said. "I believe that muni market participants are engaging appropriately in the dialogue about the objective of a smoothly functioning, transparent market. It's just a healthy debate on how to accomplish that objective."

Acknowledging that many issuers are opposed to giving federal regulators more power over municipal disclosures, Holby said that any additional changes would therefore likely require the consent of issuers.

Turning to tax issues, Holby said he aims to function like a "field general" in terms of guiding members with needed expertise to the appropriate projects.

"I think that the president of the organization is simply the one who tries to give direction," he said. "One of our responsibilities is to try and locate members who are ready to go to work and get them engaged ... If it's a tax law proj ect, I want to make sure the right people on that track."

He said that he will work to push forward with the priority list of tax projects that NABL released back in June, which includes calls for the Treasury Department to update rules or issue requirements for arbitrage, solid waste disposal facilities, record-keeping, and tests for bonds backed by payments in lieu of taxes.

He acknowledged that the list is rather full and said that because he expects the Treasury will also have to devote time and resources to unforeseen market-driven events, he will not be surprised if the department is able to complete only some, and not all, of the projects this year.

"We have a very healthy list of projects that we would hope to get some action on," he said." I think that we realize that you don't have to tackle everything at once ... they will prioritize them as they can."

Regarding more specific developments in the tax area, Holby said the recent proposed update to the public approval requirements for private activity bond-financed projects could, when finalized, lift a significant burden on muni market participants.

Among a number of changes, the proposed regulations would allow issuers to provide online notification of a public hearing for a bond-financed project, shorten the time between the notification and the hearing, and allow issuers to cancel a hearing if no one expresses interest in attending.

"These public approval requirements have been in place since 1982 ... nobody's really asking that they be removed altogether, but making them a little less burdensome would be a big help," he said. "I think Treasury has done a terrific job of taking a fairly mundane area and relieving us a lot."

He added that he expects NABL to provide comments on the proposed regulations sometime in the coming months.

EXPERTISE

Holby noted that in the past several years, including during the term of his predecessor as NABL president, J. Foster Clark, a partner at Balch & Bingham LLP in Birmingham, NABL has established itself in part as a warehouse of technical experts able to dispense advice to the market. Going forward, Holby would like to buttress NABL's cachet as an "honest broker."

"The way I think of it is we don't have any money and we don't have any power but we have a virtual monopoly on intellectual capital when it comes to the tax-exempt finance industry," Holby said. "We have an enormous resource - people who know what's going on at the state and local government level. It's just an enormous resource."

Meanwhile, Holby hopes to quickly find a replacement for Elizabeth Wagner, the group's former director of governmental affairs, who left NABL in August to join the Internal Revenue Service as senior counsel to the commissioner of the large and mid-size business division.

A NABL committee chaired by John McNally, a partner at Hawkins Delafield & Wood LLP in Washington, is in charge of a search committee that has hired a national recruiting firm to help with the search. The group is optimistic that it will be able to hire a successor by its board meeting in November, Holby said.

Some of NABL's big-ticket projects for the coming year include the expected publication next summer of a significantly reworked Disclosure Rules of Counsel, which was last published in 1994. McNally is now leading the project, which has been in the works for several years.

Another project that NABL hopes to publish later in the next few months is an approximately 150-page treatise on interest-rate swaps for general practitioners that the group is working on with assistance from the International Swaps and Derivatives Association. The swaps project is being co-written by Stacey Crawhaw-Lewis and Cynthia Weed, partners at K&L Gates LLP in Seattle; and E. Tyler Smith, a shareholder at Haynsworth Sinkler Boyd PA in Greenville, SC.

NABL is also working to update one of its most central documents, the Function and Professional Responsibilities of Bond Counsel, which has not been reviewed since the early 1990s. The project is being co-led by Meredith Hathorn, a partner at Foley & Judell LLP in New Orleans, and Thomas "Buddy" Downs, a partner at Ice Miller LLP in Indianapolis.

Holby's practice includes a broad range of work for traditional governmental issuers and issuers of private activity bonds. He also represents financial institutions in credit and liquidity matters.

Holby 54, who graduated from Vanderbilt University School of Law in 1979, has spent his entire legal career at King & Spalding. He began working on private activity and industrial development bond deals in the early 1980s. Following a wave of four restrictive tax bills, culminating with the Tax Reform Act of 1986, Holby migrated to the firm's banking practice and spent four years doing conventional lending work representing financial institutions. When the public finance practice at the firm continued to flourish, he returned to it full time in 1990, and has been practicing there since then.

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