Did it have to be this bad?
In the wake of the near-meltdown of the global financial markets, it can be tempting to conclude that the losses faced by municipal issuers and investors in recent years were unavoidable. In a maelstrom, all ships are at risk.
Jim Lebenthal, the dean of municipal bond salesmen, isn’t buying it.
In his newest book, “Lebenthal on Munis,” he looks back over the last five years and concludes that tax-exempt issuers and investors could have weathered the storm better … if not for leverage and the overuse of floating-rate and synthetic financing structures — which exposed investors to losses and issuers to wildly fluctuating debt-service bills.
His last book was titled “Confessions of a Municipal Bond Salesman.” In his new work, which clocks in at a breezy 130 pages, he is again feeling penitential.
“If only I had waited three years. Today I’d really have something to confess — my outrage. At an industry, my industry, that was doing just fine for itself and for the whole country … but then, felled by the curse of good times … made a lousy decision.”
Lebenthal calls it “straight talk.” Others in the business might label it “friendly fire.” Either way, it’s a relatively rare dose of raw honesty for the industry. After a career spent educating individual investors about the safety and earnings potential of tax-free municipal bonds — and loudly defending those same investors from the occasional politician or judge who’d threaten to welch on the debt — Lebenthal is keenly aware that the public’s confidence in the market has been placed in jeopardy, and he’s angry about that.
Ostensibly an investors’ guide to municipal bonds, Lebenthal on Munis includes practical discussions about the legal framework underlying general obligation debt and explanations of laddered and barbell portfolios, and a warning that investors should do their own homework, rather than merely taking silver-tongued salesmen at their word.
“The OS [is] the ultimate tranquilizer gun for the fast-talking bond salesman,” he writes. “The OS is not meant to sell. It’s meant to tell.”
Many of the investor-focused sections are available for free as an “e-book” at Lebenthal’s Web site,
Lebenthal leaves few sacred cows standing — the author even second-guesses himself in his role as a board member at MBIA Inc., parent of the largest municipal bond insurer.
“How could the entire municipal bond insurance business convince itself that its success with munis, which so rarely default, is interchangeable with mortgages and other businesses that can default, do, and did?” he writes, adding a cold epitaph for the industry: “[By 2008], 'triple-A, insured’ had all the relevance of 'no new taxes’ and 'he kept us out of war.’ ”
“We forgot that it wasn’t our insurance that made municipal bonds safe,” he writes. “Insurance simply made municipal bonds more marketable. Just the way insuring collateralized debt obligations and credit default swaps — and rating them triple-A — would make these enigmatic inventions marketable.”
Of course, even the market’s sharpest critics have to concede that investors have been far more willing to re-embrace municipals than other asset classes — whether through the Build America Bond program, or through traditional tax-exempt structures.
But is the past truly past? Lebenthal isn’t so sure.
While embracing Build America Bonds as logical policy for the federal government and a clearly good deal for issuers, he worries that the program’s incentives may lead to inefficiency: “When two parties are willing to foot a bill, it is easy for the two of them combined to end up overpaying to dig the tunnel or build the bridge.”
A greater threat could come from the fiscal crisis still enveloping states and cities across the nation. In Lebenthal’s world, municipal bonds are scarce resources to be reserved for projects with a strong economic rationale that can, in turn, generate tax revenues and economic growth that can support still more projects. In the book’s investor-education passages, he urges buyers to keep an eye on the “capital inherent in the project.”
For states and cities facing yawning deficits as the recession depresses tax revenue, he has one plea: “I know you can borrow your way out and finance a deficit with good, old GO municipal bonds. And you probably will. But please. Please hold back on some of your limited borrowing capacity. Save your seed corn to plant in the infrastructure and grow still more seed corn.”
Michael Stanton is publisher of The Bond Buyer and welcomes your comments via The Bond Blogger at
