American Investors Deserve Answers
MunicipalBonds.com Responds to its Critic -- the MSRB and its Executive Director Christopher Taylor

Kit,

From the beginning of my fair pricing efforts, you have been my unfailing critic. This criticism is odd given that your job is supposed to be to promote fair pricing. Throughout my efforts to post trade and price information, to Red Flag particular Muni markets, and to release "Worst Spread" reports, you have continued to attack the work and have provided wrongdoers in this industry with an unnecessarily apologetic voice.

You have done this despite the fact that you could at any time release the true facts to the public by releasing Municipal Bond data with dealer identifiers. This would once and for all provide proof of my claims and clarify exactly what spread each dealer was charging its customers what a concept! Such a move would also provide consumers with a basis for comparing dealers and permitting them to choose dealers who treat customers fairly.

You have failed to do this. Indeed, you have yet to provide any evidence that any of the facts shown in my reports -- facts derived from the data that you release to the public -- are incorrect. You have failed to provide any evidence that would refute my basic contention that broker/dealers are systematically overcharging their customers. You cannot continue to downplay my findings with mere assertions of clerical errors. If there are errors, it is your data and you are empowered to clarify these errors. Because you have not done so can only lead to the conclusion that my findings are correct and that you are protecting wrongdoers rather than the public you have been appointed to protect.

Because you have failed to carry out the primary task for which you have been placed as the head of the MSRB, I will not rest in my efforts until you adequately respond to the following:

1) I am providing you an "unfiltered" list of the worst one thousand (1000) Municipal Bond bid/offer market spreads in 2002. Everything we get from the Daily Transaction Report is included in this list and you'll see 90-point spreads. For our own year-end report, which you criticized, we had filtered out what could reasonably be interpreted as typos. This brought our worst spread down to 79 points. For you, I won't remove any spread.

1000 Worst Bid/Offer Market Spreads for 2002

• I challenge you to correct in its entirety this 1000 Worst Spreads list.
• Be specific with your corrections...how and why is a spread being excluded and your evidence for the correction.
• Show everyone your list of the worst Municipal Bond spreads in 2002, and also please identify why you claim particular trades to be "aberrant".
• Also, please highlight what your 1000th worst spread is. We see 9.233 points.
• Explain why any of your corrected worst spreads (the absolute worst to the 1000th worst) should be acceptable to Municipal Bond investors and what efforts have been made to correct these particular spreads.
• Identify the broker/dealers making these trades.

2) In January when I released my annual One-Hundred Worst Spreads of 2002, you criticized the study and attempted to dismiss it by focusing on only 11 transactions. You suggested that 11 is a very small number compared to how big the Muni markets are. I hate to inform you but I didn't Red Flag just 11 trades nor just 100 as the report showed, nor 1000 as the above link shows. There were thousands.

This is how Municipal Bond trading and pricing should be explained: To begin with, there were exactly 3,935,189 actively traded Municipal Bond transactions in calendar year 2002. But as everyone should understand, this aggregate figure doesnt really matter. It has little analytical value. For Red Flagging and Worst Spread studies, I consider specific Muni markets within the aggregate amount of trades. A market is when there is a bid and offer side reported for the exact same Municipal Bond within the same trading day, or at least two bids or two offers. In 2002, there were exactly 644,216 actively traded Muni markets. These markets are what I Red Flag.

What matters is how a single market of transactions in the same Municipal Bond was spread, and if all investors were treated fairly. In 2002, I Red Flagged 162,092 out of the total 644,215 Muni markets for wide and potentially illegal market spreads. Thats it.

• Please explain why you would use such over-simplified and purely
rhetorical devices to avoid the real issues at hand?
• Do you object to my Red Flag parameters?
• How would you go about Red Flagging?
• Please explain how so many Red Flags can exist when the MSRB is supposed to be establishing rules to prevent customer rip-offs?

To allow you and others to more easily understand how the Municipal Bond markets should be judged, I will launch a new percentage (%) based indicator. Based on 644,216 actively traded Muni markets in 2002, and 162,092 of those being Red Flagged, it is fair and reasonable to claim at least 25% of the Municipal Bond market was broken in 2002.

• Do you have any comments to make about this new methodology?...or do you still contend there is nothing wrong with pricing in the Municipal Bond markets, that all my Red Flags and Worst Spread reports are wrong, and that out of 3,935,189 transactions there are only 11 problems???
• If you want to consider and judge individual trades with respect to fair pricing, do you how to do this? Because I do.

3) I have never hidden that I utilize the MSRBs own "Daily Transaction Report." I do so because it is, or should be, the simplest and most logical data to rely upon. The "Daily Transaction Report" is the MSRB's official "next day" report of yesterday's "actively traded" Municipal Bond trades. But it only covers "actively traded" bonds. Since 1994, you (the MSRB) have defined "actively traded" as those bonds trading at least four (4) times in a single day. Because of MunicipalBonds.com and the pressure it generated in 2002, you released more next day information. The definition of "actively traded" changed from four (4) trades in a single day down to three (3) in May, and most recently from three (3) down to two (2) in December.

For most this whole thing probably sounds pretty odd, if not crazy. But it gets worse.

Your other trade and price report, the "Comprehensive" Report, does not consider if a bond is actively traded. It provides data for all trades. But this report is delayed. At first you delayed two months...or in other words you didnt allow anyone to look at todays trade and price data until two months from now. Again, because of pressure from MunicipalBonds.com, you shortened the delays to one month, then two weeks, and then one week. Thanks, but no thanks.

I have continually demanded that all trade and price data be released next day.

I have continually demanded that, if there are errors, you release a dedicated and public error report to correct the next day data. These arent outrageous demands.

Though you have time to talk about me with reporters and so on, neither you nor any member of the MSRB has ever contacted me, nor have you ever provided me with a single correction, nor have you wanted to discuss anything with me.

All of this leads me to question your own methodology and motives:

• I challenge you to explain your price transparency schedule? Why has this taken from 1994 to 2003?
• Will you release all data next day?
• Will you follow up the next day release of all data with a public and specific "correction only" report?
• Are you admitting there are problems or major problems with price reporting?
• How and specifically who catches typos/mistakes? How does that work?
• How are you going to improve price reporting if there are problems/major problems?
• What are your audit efforts and audit schedule?
• How do you intend to punish those broker/dealers who do not properly report? and
• How the hell do you intend to go to "real time" price reporting if you can't even get next day reporting right?

In conclusion, I'm not sure what you, or anyone on the Street for that matter, were expecting with "price reporting." Price reporting was supposed to lead to this thing called "price transparency." That's all I'm doing. Red Flags and Worst Spread Reports are just part of that. What did you want?

With price transparency, I thought it was supposed to lead to this thing called "fair pricing." It appears that the MSRB is not as serious about fairness but appears much more beholden to promote the current broker practices of unfair pricing. For this you owe the Country some answers.

Kevin Olson
Executive Director
MunicipalBonds.com