Staying for the Long Haul

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

"A feather merchant?" replied DuCote, now senior managing director and chairman of theexecutive 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 threeparagraphs to describe what he did and to distinguish him from the world at large,according to DuCote.

Behind the municipal mystique, the motivations for staying in the business includepublic service, self-image, and cold hard cash.Anecdotal evidence and an informal survey conducted by The Bond Buyer point to atendency of people to remain in the municipal industry longer than their counterpartsworking with other fixed-income products.

Reflecting the overall tendency to change jobs and even careers with increasingrapidity, the median time wage and salary earners stay with their current employer isonly 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 bondcounsel for 2002, some responses showed that employees working in municipals had been atthose firms roughly 28% longer than people working in other fixed-income departments.

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

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

Longevity Rules

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

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

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

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

Bond Buyer statistics show that the top 10 issuers came to market with $106 billion innew paper versus total issuance of $1.05 trillion in the period 1999 through 2002. Inaddition, 3,894 municipalities brought more than $5 million in new issues in the sameperiod, according to the Municipal Issuers Registry. The Bond Market Associationestimated 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 developinsight on than there would be in the corporate market, where having relationships witha small number of very large companies gives you much greater access to profitability inthe business," Studer added.

While the issuers and the bonds in the marketplace are numerous, the municipal bondcommunity is modest in size, with roughly 285 firms and 8,597 individuals listed in thespring 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 relativelyselect group of people with its own language and customs that have developed since theearly 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 withthe knowledge a competitive advantage, according to David Thompson, a senior vicepresident and director of fixed-income investments at Hale and Dorr Capital ManagementLLC 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 theunderwriters and the marketers."

Mysterious Munis

For Linda Kelly, a vice president at RBC Dain Rauscher Inc. in Dallas and a 38-yearveteran of municipals, the uniqueness of tax-exempts does not immediately translate toother 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 alot of people who know it and are good at it. So you stay."

Dealing in the product requires a good memory for the different credits as well as theability 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 botha 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 seethemselves 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 financialinstrument," said Elke Weber, the Jerome A. Chazen professor of international businessat Columbia Business School and a specialist in management and psychology. "As you gothrough schooling in-house or external training for a position, you not only acquireexpertise 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 ofhabits and a resulting resistance to making every decision anew.

"The building up of expertise has to do with factual knowledge but also involvesprocedural knowledge," she said. "We know exactly what to do, and we don't have to thinkabout it. We can be confident we're doing the right thing because we've been doing itsuccessfully 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 purelyutilitarian standpoint it can be helpful knowing whom to call on for information, thoserelationships 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 thatperson," Weber said. "And if you switch to a different position you have to rebuild thatwhole social network. And that's somewhat anxiety-provoking."

Not only do relationships and reputation provide comfort which contributes to thesecurity of one's place in the municipal community, but relationships founded uponintegrity 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 inanother firm because you need to keep the relationship open when the shoe might be onthe other foot," she said. "You might be able to massage another one eighth of a pointout of a friend if you needed to. So you keep the relationship open and you keep ithonest."

Tom Friery has been treasurer of Sacramento since 1977 and has worked on the issuer sidesince 1968, both in Washington state and California. He subscribes to the view that themunicipal business is a business of one's word."Once you say it, it is," he said. "You screw people up once and you're out of thebusiness. If you buy a security and in 72 hours it has to be paid for, everybody trustseverybody that it's going to be done."

In his position as treasurer, Friery takes delight in representing the community andbuilding relationships among the parties involved in a deal.

"When you're going to borrow $200 million and people trust you to do that - theunderwriter, the bond counsel, the underwriter's counsel - it's a major mission thatwe're all taking," he said. "We come up the field together, we all have little differentangles that we're protecting but we're all proud of the product."

Satisfaction Guaranteed

Away from the relationships, DuCote pointed out the pride he takes in underwritingprojects and seeing them come to fruition, with the consequent improvement of people'squality of life.

"All these advances come under the guise of municipal securities and tax-exemptmunicipal bonds," he said. "The lovely thing is you can't junk them up - management isrelatively sound. People say there are exceptions, but they're rare. On our side we canpoint to many things that we're extremely proud of and that over the years we'vecontributed to. It's very satisfying."

In Minneapolis, Darci Doneff, a managing director and manager of the underwritingdepartment of U.S. Bancorp Piper Jaffray, who has been in the business since 1980, saidshe enjoys the variety of the business and the tangible nature of the product.

"It may sound a little bit corny, but I can get my children to relate to what I dobecause I have bought the bond issues of the school they go to," she said. "I trade thebonds that financed the hospital where they were born, so you can make it a little bitmore personal about how public projects get financed."

From the legal perspective, Roger Davis - chair of the public finance department atbond counsel Orrick Herrington & Sutcliffe since 1981 and who has been in the businesssince 1975 - said there was something innately attractive about the orientation ofpublic finance practice, where the adversarial character of the transaction gives way toa common objective."If you're working on an IPO and you get a bunch of people who are about to get rich,they're going to have a different attitude about the process and issues that are raisedin the transaction than a group of people who are trying to cause to come into existencesome public project, like a new sewer treatment facility for the public good, and whodon't have any personal financial gain from the transaction."

Be a Builder

Echoing the sentiments of Davis, Napoleon Brandford 3d, who is chairman of SiebertBrandford Shank & Co. and started in the business in 1979, underlined the pivotal placeof municipals in the community. In providing the wherewithal for the financing ofairports, stadiums, and inner-city schools, tax-exempt bonds finance some of therequisite infrastructure for the rebuilding of communities.

"It's very important for the kids who can't afford to go to private schools to be ableto get a good education," he said.

Part of Brandford's motivation to stay in the municipal industry is his desire toprovide inspiration to young people who, like him, are African-American."You can think of projects all around the country, whether it's the Detroit Tigersstadium or the state office building in downtown Oakland that was destroyed by anearthquake that was rebuilt in 1998," he said. "To be able to point to those things,kids are impressed and they say `I want to be like him.' "

In the legal sphere, Davis said lawyers find the work in public finance attractivebecause it encompasses a broad range of practice areas such as taxation, securities,environmental, anti-trust, and real estate law, as well as the many species of bonds.

"There are so many different varieties of bonds that it doesn't lend itself to routinelegal work that often can become boring," he said.

With bond work, there is also a defined time in which to accomplish the legal tasksinvolved in a bond sale.

"It tends to have a beginning, a middle, and an end somewhere in the three-to-five-monthrange, and that's quite unlike litigation and quite unlike a lot of corporate counselingand other matters than don't have such a compressed time schedule," Davis added.

For attorney Arthur McMahon, who is practice group leader of the public finance group atNixon Peabody and has been working in the area since 1973, the smaller community ofparticipants in munis makes it easier to bear the burdens of the work including latenights and short time schedules.

The aim is not to score points off an adversary, McMahon said, because it doesn't servethe interests of clients to turn a meeting into a hostile engagement.

The approach, he said, is one of "we're going to go over this issue, we're going toargue about it, but we're all together and we realize that we're going to play togetheron another deal, if not three weeks from now then three years from now."

The Right Reasons

A structural change that caused some settling in the municipal business was the TaxReform Act of 1986, which removed whole categories of projects from the purview of tax-exempt funding. A shake-out in the market followed in which both participants and firmsleft the sector, with issuance dropping from $204 billion in 1985 to $143 billion in1986 and to under $100 billion in 1987.

Those who were still in the market after this consolidation tended to stay, according toDavis.

"With the 1985 tax act that became effective in September 1986, that changed everythingand contracted the market substantially," he said. "A lot of people who stayed, stayedfor all the right reasons."

Claire Cohen, a vice chairman at Fitch Ratings who started in municipals in 1956, saidthe business was the hot industry to be in during the early 1980s. Along with theexpansion in ratings, the consequence has been that people who came into the firm atthat time stayed.

"I think a lot of people stay in the field because they're interested in it, and forpeople of that generation the rating agencies were a tremendous opportunity," she said."Maybe they started in their 20s and now they're in their 40s today and they're thesenior people."

Whether people in the industry are in the public or the private sector, they tend tostay in municipals out of a sense they are doing important work, according to JeffreyGreen, general counsel at the Port Authority of New York and New Jersey who has workedin the business since 1969.

"People feel that they're doing public business and doing good work, and they canactually point in most cases to the bridges and the tunnels and railroads and thesubways that have been built," he said.

And whether longevity in municipals derives from the satisfaction of seeing projectscome to life or from finding a niche in the industry, the business still grabs and takeshold of many of its participants for long periods of time.

Ultimately, DuCote believes municipals are an asset class through which people can makea positive contribution and are a product people can commit to and upon which they canbuild a career.

"If you like to build things, this is the place to do it," he said. "I would encourageany child to come into this business because I think there's a bright future here. Ican't think of a better industry to find oneself in."