CORONADO, CALIF. – The 2008 financial crisis wrought radical changes in the municipal market, but those changes may not have prepared the market for its next challenge, analysts said Thursday.
The legacy of the calamitous financial meltdown of 10 years ago was the subject of a panel discussion at the National Federation of Municipal Analysts’ annual conference. The wide-ranging conversation touched on the changes in market conditions, the technological advancements in the industry, and the regulatory changes born from the reaction to the crisis.
“The things that happened 10 years ago, it’s hard to even remember,” said Mary Colby, vice president and head of municipal research a Charles Schwab Investment Management. Colby said change has been so dramatic in the muni market from that time, noting for example the sharp decline in bond insurance coverage.
Tom Doe, president of Municipal Market Analytics, said that although the marketplace has access to far more data now than it did 10 years ago, some of the fundamental challenges have not gone away.
“Trading really hasn’t changed in terms of the volume,” Doe said. “Liquidity remains an issue. We don’t have more liquidity just because we have more offerings, more bonds available.”
Doe said that the market has not yet perfected how to use all the data now available. “We really are still struggling with how to use it effectively,” he said.
Doe, a former Municipal Securities Rulemaking Board member, said that the MSRB has now effectively joined the data vendor pool as it has increased the amount of data it collects and disseminates over the years.
“They are now a player in the vendor space,” Doe said, adding that he and others have speculated that the MSRB should split into rulemaking and data divisions. “Maybe that’s an interesting concept,” he said.
Doe said current increases in risky issuance as a percentage of the overall market, a product of the low interest rate environment that has persisted since the crisis, are somewhat similar to the run-up to the crisis when risky issuance became more common for several consecutive quarters.
The panelists also discussed the significant regulatory changes that occurred as a result of the crisis, saying that they were generally well-intentioned but in some cases were not effective or were misguided.
“I think the concern with systemic risk was well-placed,” said Rick Cosgrove, a partner at the law firm of Chapman and Cutler. But despite the efforts of lawmakers to reduce systemic risk through the Dodd-Frank Act, Cosgrove said, some of the banks are larger than they were before the crisis.
Colby and Cosgrove also agreed that tender option bonds, or TOBs, were unfairly swept up in regulatory changes. The Volcker Rule, named for former Federal Reserve Board chairman Paul Volcker and part of Dodd-Frank, was aimed at restricting proprietary trading by banks. The rule restricted banks and their affiliates from sponsoring a TOB program or owning a residual certificate issued by a TOB trust, forcing bankers to come up with new structures to cover the market.
“A lot of us felt TOBs got mistreated,” said Cosgrove.
Moderator Alex Wallace, a managing director at U.S. Bank, also touched on another product of Dodd-Frank: the creation of the municipal advisor regulatory regime. The law and the subsequent Securities and Exchange Commission and MSRB rules adopted as a result placed significant new obligations on those who give bond-related advise to issuers.
Wallace said he believes that rule was responsible for the popularity of bank direct lending over the past decade.
“The municipal advisor rule has been a significant change in our marketplace,” said Wallace. “I do believe that additional burden contributed to an increased interest in the direct purchase market.”
Panelists said they are not convinced the market is prepared for the next potential crisis.
"I think the jury is out, Doe said.
"I think we have a lot of work to do," Wallace said.
The NFMA’s conference concludes Friday.