How Tom Gallo has navigated a half century in munis
The year of 1968 had its share of turmoil and highlights. The war in Vietnam was raging; Sly and the Family Stone was at the top of the charts; Martin Luther King and Bobby Kennedy were tragically taken from us.
And Tom Gallo reported for duty in the securities industry.
Now the managing director responsible for the short term desk at U.S. Bank, Gallo hails from Brooklyn and attended St. John’s. He started as a junior equities trader who sometimes took orders for munis at Steiner Rouse & Co., a firm we have long lost track of now. He was very familiar with the Pink Sheets. Look it up if you need to.
In the financial markets, 1968 was the year of the paper crunch. There were so many orders that the Exchange for a time operated from 10:00 a.m. to 2:00 p.m. Catching up with the paperwork took place frequently on Saturdays. The municipal market had very low rates and, while issuers such as Triborough Bridge and Tunnel Authority were around, many agencies and authorities weren’t yet very active in the bond market. Inflation was a fear due to the war. The market hit the trough in ’72-’73 with a recession.
Annual municipal bond volume was a fraction of that of recent years at about $40 billion, and there was a real Summer lull. Most of the deals were priced in the morning and any real trading was done by noon.
Gallo’s career accelerated when he moved to municipals in 1974 at Security National Bank of Long Island — later taken over by Chemical Bank — and began to focus on the short end of the curve.
He worked at both Chemical and JPMorgan and concentrated on the dealers that he came in contact with every working day. He is known for attention to detail and a strong desire to fulfill the wishes and orders of both issuers and buyers. He is what we used to quaintly label as an honorable middleman. The phrase still carries weight.
I asked Gallo about some of his standout recollections over the years. We talked about 2008 in particular. He was at DEPFA-First Albany Securities at the time and recalls spending a great deal of time reviewing documents. He stressed that many clients were uncertain of the contents because the scenario we were all experiencing had not been anticipated or contemplated: It was the greatest financial shock since Post-World War II.
Gallo said participants had to review the specifics of how to put securities back to the banks. Many features of insurance, bank lines and bank letters had to be reviewed and fully comprehended. Short rates moved from 1.60% to 7.96% and back to 1.50% in the course of a six week transition period, he said.
Not wanting to have him just bask in memories, I asked Gallo what his thoughts are going forward today. We talked about any potential resurgence in VRDN’s, swaps, commercial paper and other products, and influences on the short end. He cited that money market funds now stand at about $130 billion versus $568 billion just before the fiscal crisis. He is optimistic that as rates ascend there will be more activity in and demand from the money market funds.
Gallo cited Tax Reform as a cause for an attenuation in the corporate sponsorship for depositing funds on the short end for a time. Given the flat yield curve, he believes the spread from short to long is ripe to increase support for more activity on the short end. His demeanor brightened when he discussed how the Higher Education sector continues to utilize commercial paper before project costs are known, before taking the obligations long.
We reflected on which securities have been the easiest and most difficult to trade. He quickly offered that the vintage HUD notes were the most liquid securities in the market from when he started to the mid 1980s, and lamented that the paper is now taxable.
When I pressed him on which securities were the most difficult to trade, he demurred. I do not have a grudge about his answer because in 50 years he had to participate in many compliance training meetings.
He mentioned that another career highlight was the underwriting of California Department of Water Resources bonds when he was at JPMorgan. The transaction par was $11.26 billion, with a full $3.75 billion in variable rate mode. Gallo was instrumental in getting that deal done.
When he joined U.S. Bank 10 years ago, he was given the opportunity to build the short term business from the ground up. Alex Wallace, Managing Director and Head of Public Finance, is an admirer of Tom’s career, style, and tenacity and credits Gallo for building a significant and successful short term business from zero. What is more impressive is that Tom started this business at the age of 64. Perhaps, more potential employers should consider older eligible candidates.
Tom has attributed his current success in great part due to the integrity of the bank and of his colleagues. U. S. Bank has been awarded a top tier position for the last four years in the Ethisphere Institute rankings. Tom believes that this ethical standard supports him in all of his daily activities. He also credits the bank with using its own capital judiciously. The bank’s remarketing book is growing apace due to top ratings of Aa/AA/A1+ and to Tom’s management of the book. The bank is in the top 10 in remarketings and has had more impressive growth of late.
We reviewed together some of the improvements that have been gained over the years. He suggested that disclosure has been greatly improved even for short securities. He praised the improvement in systems for eased order systems and greatly improved tracking and measuring. He was quick to add that he also values the oversight for said systems. Gallo values reliability. We talked about ratings as being necessary despite some of the shortcomings of the past.
As for changes with Issuers and buyers over the course of his career, Gallo suggests that Issuers are more savvy and engaged. They conduct more careful reviews and are more inclined to attend and participate in conferences to attain insight and knowledge. He also believes that Issuers are better equipped with more independent data and are much more attuned to market changes. He also offered that the municipal advisors for issuers wield more data than they ever have in the past. Gallo was somewhat cautionary about the fact that buyers are fewer and more consolidated. He suggested on the short end that there used to be 62 fund families and now there are only 23.
I asked him if we will have an inverted yield curve soon with much higher rates on the short end. He was quick with a firm “no.”
What advice he would give to a younger person coming up in the business? Gallo would urge them to maintain personal integrity and to work at a “good” firm such as his present firm, U.S. Bank.
As for what the future holds, Gallo has no specific timeline guiding him towards retirement. Alex Wallace, head of public finance at U.S. Bank, said he would hope to have Tom on the team as long as Tom believes he is adding value.
When I asked Tom what he would do if it was not short municipals, he did not hesitate. He takes the boat out with his son on Long Island Sound in pursuit of the big catch. They had luck once with a sizeable catch. But I think there are more tales of fish lore ahead, just like the short municipals he has come to know so well.