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Sandy Creates Challenges for Muni Industry

Hurricane Sandy has left major challenges for many municipal bond firms to restore full operations. The Financial District of Manhattan was hammered hard by the storm.

There was extensive flooding to downtown and other parts of New York City. All the major subway and car tunnels under the East River were flooded. These are the primary transportation routes from Queens, Brooklyn and Long Island into Manhattan. Subways are expected to be shut for days, though limited bus service could start as soon as Tuesday afternoon.

All the major U.S. financial markets were closed Tuesday, though the Securities Industry and Financial Markets Association has recommended the market be open Wednesday for the trading of U.S. dollar-denominated fixed-income securities.

Most of downtown Manhattan and lower midtown Manhattan was without electricity as of noon Tuesday, and there were also major problems with phone calls into lower Manhattan and other storm-affected areas.

Despite the storm, some firms in the affected areas reported doing OK.

Goldman Sachs kept its headquarters office in downtown Manhattan and another major building in Jersey City, New Jersey closed on Tuesday.

However, the firm has business continuity plans in place to allow it to do business even if the two buildings are closed, a firm source said. The firm did bond trading on Monday morning, when the markets were open, she said.

Both buildings are in fine condition with no significant storm damage, she said. While the neighborhoods where the buildings are located may not have electricity, both buildings have backup electricity generators, she said.

The source was not sure if the buildings were having problems with phone service but said the firm had plans to deal with this problem, if it existed.

Transportation to the New York and New Jersey offices remains a concern, she said. This is not just because of the public transit problems but also because of street flooding and downed trees.

However, Goldman Sachs has offices in London, Salt Lake City and other locations that will help it to continue operations, according a memo sent to Goldman Sachs employees Monday afternoon.

"Public Financial Management Inc. is serving clients through our offices throughout the country that are unaffected by the storm," said PFM Director of Communications Sandra Sosinski. "Our offices in Philadelphia; New York City; Boston; Arlington, Va.; Providence, R.I.; and Albany, N.Y. were closed [Monday]; a few reopened on a limited basis [Tuesday]. However, we all have remote capabilities and are in contact and maintaining a reasonable work flow."

Some investors based in and around the New York metropolitan area with power or Internet access are using the time to assess their positions in the market and determine what they can do over the next few days.

John Mousseau, a managing director and portfolio manager at Cumberland Advisors, lives in Maplewood, N.J., 30 minutes outside of Manhattan. Most of his neighborhood has lost power.

He is using this time to look at the calendar and ascertain what should still reach the market. "Because there are probably going to be fewer market participants on deals this week, as everyone gets back into their offices and up online, anything that arrives this week will arrive at a yield premium, so you look for ways to take advantage of that," he said. "You'll probably have to raise yields in the short term to clear much of anything."

Mousseau said he's also taking a look at the firm's holdings in the New York-Philadelphia area. But it's too early to assess all the damage, he added. Some of what the municipal bond industry can expect is to see revenue hits to toll bridges and roads. But they should be temporary. There also will likely be added stresses on budgets, as well as possible downgrades to credit ratings, Mousseau said.

But there is also a solid chance the federal government will come together and help in the short term. "Following the U.S. elections, and with a lame-duck congress, the attacks on muni bond products most likely will stop," he said. "And you'll probably get legislation passed for those projects that need to get done quickly."

Another portfolio manager living in Manhattan had cell phone service, but lacked power. He could connect to other firms, he said, but needed to see to some damage around his home first.

As most market participants living in and around the city can't get to work, the portfolio manager said, little trading would likely happen in the market Wednesday. But many New York-based firms, particularly the large brokerages, can still conduct a lot of business, he added.

"Most of the other major brokerage firms have offices outside the New York metropolitan area," he said. "I would assume that for them it's business as usual. As the New York metropolitan area is closed, that would slow down trading at this point involving firms based here. But for people in, say, California, they could conduct business with others outside of the New York metropolitan area."

The Municipal Securities Rulemaking Board has rescheduled a board-meeting-related conference call with reporters for Wednesday morning. During the call, which was originally scheduled for Monday, board members are expected to review topics discussed during the board's Oct. 24 -26 meeting. Topics could include investor protection efforts, electronic brokerages, bond ballot campaigns, municipal market indices, bondholder consent and collecting data on 529 college savings plans, the board said.

Florida, no stranger to the devastation and anxiety that hurricanes can bring, postponed an $88 million lottery revenue bond sale for the State Board of Education that was to price this week by the Division of Bond Finance.

"We were looking to sell this week but obviously will not sell because everyone has battened down the hatches," said division director Ben Watkins. "It would not be prudent to sell a competitive deal until things get back to normal."

Watkins said he will monitor the bond market day-by-day to ensure that firms are back in "business as usual" before determining when to sell the lottery bonds.

Watkins, who has years of experience dealing with the market following tropical storms that have ravaged Florida and other parts of the Southeast, said he does not expect current low interest rates to be affected in the wake of Hurricane Sandy.

"I would not expect it to have any impact on bond pricing or anything like that," he said. "I think the market will just take a breather and we'll pick up where we left off.

The initial economic impact of Hurricane Sandy could be large with the 12 states in the affected New England and Mideast regions accounting for 23% of national gross domestic product, according to Capital Economics. The New York metropolitan area alone accounts for 10% of GDP.

Current estimates put the total cost of the storm at between $10 billion and $20 billion.

Under an extreme assumption that all output was lost in the two affected regions for two days, it would equal a reduction in monthly output of 8.7% and a 2% loss nationally, Capital Economics estimated.

Lynn Hume, Jonathan Hemmerdinger, Jennifer DePaul
and Shelly Sigo contributed to this report.

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