Thursday, November 20, 2003

By Nicholas Chesla

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When Joe DuCote first entered the municipal bond business in 1969 with the New York firm of Eastman Dillon Union Securities, one of the senior traders asked him if he was going to be a feather merchant.

"A feather merchant?" replied DuCote, now senior managing director and chairman of the executive committee at Sutter Securities Inc. in San Francisco. "That's interesting, what does that mean?"

"You're going to deal in a product that's hard to describe and few people understand," said the trader, Jack Blair, a man who loved the fact that it took two or three paragraphs to describe what he did and to distinguish him from the world at large, according to DuCote.

Sutter Securities' Joe DuCote

Behind the municipal mystique, the motivations for staying in the business include public service, self-image, and cold hard cash.

Anecdotal evidence and an informal survey conducted by The Bond Buyer point to a tendency of people to remain in the municipal industry longer than their counterparts working with other fixed-income products.

Reflecting the overall tendency to change jobs and even careers with increasing rapidity, the median time wage and salary earners stay with their current employer is only 3.7 years, according to a 2002 report by the U.S. Bureau of Labor Statistics.

When The Bond Buyer asked about longevity at the top 10 underwriters and top 10 bond counsel for 2002, some responses showed that employees working in municipals had been at those firms roughly 28% longer than people working in other fixed-income departments.

Though the statistical evidence is sparse, there is strong anecdotal evidence that once people get a foothold in municipals at around the four- or five-year level, they tend to continue in the business.

Why is this so? Participants from across the market spectrum provided some of the answers.

Longevity Rules

Nick Studer is a management consultant and director of the Capital Markets Practice at Mercer Oliver Wyman, an international firm of consultants that works with many investment banks.

Studer attributed the high turnover among people working with many investment banking products to the lucrative nature of the business, which causes employees to be either moved up or moved out in a comparatively speedy fashion. But his firm's experience with municipals has been different.

"When we work with these firms, we do often find that people in the municipal bond business have much more longevity," he said.

Studer also said that the fragmentation of the business - which has thousands of issuers and in which the top 10 municipalities account for only 10% of new issues - requires professionals with experience built up over a considerable time.

Bond Buyer statistics show that the top 10 issuers came to market with $106 billion in new paper versus total issuance of $1.05 trillion in the period 1999 through 2002. In addition, 3,894 municipalities brought more than $5 million in new issues in the same period, according to the Municipal Issuers Registry. The Bond Market Association estimated roughly 9,000 municipalities have issued bonds so far during 2003.

"There are a lot more clients to cover, clients to learn about, and clients to develop insight on than there would be in the corporate market, where having relationships with a small number of very large companies gives you much greater access to profitability in the business," Studer added.

While the issuers and the bonds in the marketplace are numerous, the municipal bond community is modest in size, with roughly 285 firms and 8,597 individuals listed in the spring 2003 edition of The Bond Buyer's Municipal Marketplace, known as the Red Book.

The $1.8 trillion of outstanding debt in the market is thus overseen by a relatively select group of people with its own language and customs that have developed since the early 19th century, when municipalities first recorded their issuance of bonds.

The result is that once a body of knowledge has been accumulated, it gives those with the knowledge a competitive advantage, according to David Thompson, a senior vice president and director of fixed-income investments at Hale and Dorr Capital Management LLC in Boston who has been working in municipals since 1978.

"You do what you know," he said. "To the extent that I know economics, I know finances, and I know markets, I've got an investment in knowing the traders as well as the underwriters and the marketers."

Mysterious Munis

For Linda Kelly, a vice president at RBC Dain Rauscher Inc. in Dallas and a 38-year veteran of municipals, the uniqueness of tax-exempts does not immediately translate to other products such as corporate bonds, Treasuries, or agency debt.

"The business itself has always been somewhat unique and somewhat mysterious," she said. "So if you're good at it, the business rewards you. Because it is unique, there aren't a lot of people who know it and are good at it. So you stay."

RBC's Linda Kelly

Dealing in the product requires a good memory for the different credits as well as the ability to focus on the intricacies of a trade, according to Kelly.

"You have to have the desire to have that knowledge, which is kind of kooky, to be both a studious person and a transaction-oriented person at the same time," she added.

Away from the economic motives to continue with what is familiar, how people see themselves can also provide a strong motivation to stay rather than go.

"If you have for the last 15 or even five years thought of yourself as a bond trader, it's very hard to all of a sudden think of yourself as selling some other financial instrument," said Elke Weber, the Jerome A. Chazen professor of international business at Columbia Business School and a specialist in management and psychology. "As you go through schooling in-house or external training for a position, you not only acquire expertise but you also acquire a self-image about who you are and what you do."

Weber said one of the factors which helps ingrain self-image is the establishment of habits and a resulting resistance to making every decision anew.

"The building up of expertise has to do with factual knowledge but also involves procedural knowledge," she said. "We know exactly what to do, and we don't have to think about it. We can be confident we're doing the right thing because we've been doing it successfully for the last 15 years or so."

It's Who You Know

Co-workers provide a ready-made network of relationships, and while from a purely utilitarian standpoint it can be helpful knowing whom to call on for information, those relationships can also constitute a framework for a person's life.

"You are who you are because you are a colleague to this person and a friend to that person," Weber said. "And if you switch to a different position you have to rebuild that whole social network. And that's somewhat anxiety-provoking."

Not only do relationships and reputation provide comfort which contributes to the security of one's place in the municipal community, but relationships founded upon integrity are key to survival in the market, according to Kelly.

"Each person is there to make money, but you don't want to take advantage of a trader in another firm because you need to keep the relationship open when the shoe might be on the other foot," she said. "You might be able to massage another one eighth of a point out of a friend if you needed to. So you keep the relationship open and you keep it honest."

Sacramento Treasurer Tom Friery

Tom Friery has been treasurer of Sacramento since 1977 and has worked on the issuer side since 1968, both in Washington state and California. He subscribes to the view that the municipal business is a business of one's word.

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