Joe Mysak is a columnist for Bloomberg News. The opinions expressed are his own.

Municipal Bond Dealers Set to Listen to the Thunder: Joe Mysak

April 21 (Bloomberg) -- Be clean, be fair and be fast, or be gone.

That's what the Municipal Securities Rulemaking Board will tell the municipal bond industry at the Bond Market Association's annual meeting tomorrow at the Waldorf-Astoria Hotel in New York.

The MSRB, which oversees the municipal market, has been spreading this message for months. The National Association of Securities Dealers and the Securities and Exchange Commission will be weighing in any day now with advice and opinions of their own.

They -- the regulators and the good guys in the profession - - are making a better municipal bond market. If you are an investor, you're going to be treated more fairly when you sell your bonds. If you are a taxpayer, you will be more confident that the public finance business is being decided on matters of merit and price rather than favoritism and influence.

At least, that's the idea.

Another way of putting what's happening in what is shaping up to be a very important summer for the municipal bond market is, the MSRB proposes, the SEC (and NASD) disposes.

Ban Consultants
Be clean. The MSRB earlier this year proposed banning the use of consultants.

Not the ones who provide professional services like writing feasibility studies, or the ones who help Colorado underwriters get bond issues approved by voters, not those guys. The MSRB wants underwriters to stop using people who appear to do no actual work except lobby issuers for business on their behalf.

It doesn't look good, says the MSRB. It appears to compromise the integrity of the business. The industry has until June 4 to send in comment letters. They will prove to be uncommonly good reading, if past letters on sticky subjects like this are any indication.

Little things like appearances mean a lot. Hammering the point home is an SEC investigation going on in Pennsylvania right now that focuses on the liability of professionals who handle bond transactions, among other things.

Play Nice
Be fair. Your broker is obliged to give you a fair price for your bonds. The MSRB reminded dealers about this back in January. The game isn't buyer beware, said the MSRB. This is a good thing, because municipal bonds are a pretty complicated game, or can be.

The MSRB also said in January that it noticed some wide price disparities in the transaction reports it carries every day. There aren't lots of them, perhaps a couple dozen out of the thousands of trades that occur daily, but ``they are sufficiently problematic to require regulatory review,'' the MSRB said.

Everyone who has studied the MSRB's transaction reports, which have only been publicly available since 1995, has seen these price disparities as well.

There's a gadfly out in San Francisco named Kevin Olson who has noticed them, too, and has gotten some publicity for listing them every day on his Web site, Municipalbonds.com. He has put together compilations of these trades by the quarter and by the year, and his first quarter ``top 100'' list is out now.

These lists tend to sweep up a lot of clerical errors and mistakes -- it is unlikely, for example, that on March 5, someone paid 170.924 for some insured New Jersey Turnpike bonds, and that someone else sold them to a dealer for 107.30.

Some Thunder
On the other hand, you look at some of these trades and shake your head. If you want to buy some California tobacco bonds, you pay 99.25. If you want to sell them, you get 83.50. Did that really happen?

The MSRB's reminder that this is or should not be a caveat emptor market seems to obviate the need for the MSRB's third initiative, which can be characterized as: Be fast. Next year, municipal bond prices will be available in ``real time,'' or as near to it as the municipal bond market's technology can make it -- within 15 minutes of a trade.

The NASD is looking into wide price disparities. What the market needs on this particular issue is some real instruction, the kind that the nuns in my old grammar school used to dispense with a ruler. The NASD is apparently going to come out with some soon.

There are not a lot of what the regulators call ``enforcement actions'' in the municipal market. Maybe it's because the market is incredibly clean already. Maybe it's because the NASD and the SEC have had bigger fish to fry.

When it does come, the people in the municipal market tend to scrutinize such enforcement actions very closely, because it establishes white lines, beyond which it is best not to go.

Have you seen the HBO series ``Deadwood''? ``Wild Bill'' Hickok advises a young widow to ``Listen to the thunder,'' and decamp from the town. This market needs a little thunder right now.

Last Updated: April 21, 2004 12:02 EDT