Thursday, April 9, 2009
Politics / Woods Bredesen Admits He Only Just Learned of Controversial Bond Deals
Posted by Jeff Woods on Thu, Apr 9, 2009 at 12:17 PM
Bredesen: I really first started hearing about this a couple of weeks ago. It's been a new thing for me. I certainly think further and stronger monitoring from the state, there are places where derivatives make sense. I think what happened is you had a very sophisticated seller of these things, and some people who were just learning their way making the decisions about how to utilize them. I think that perhaps with more guidance from the state and approval from the state and some better education that some forms of these can still be useful. I think they were much overused from what I can tell.
Q: What about the conflict of interest here with Morgan Keegan acting as adviser and underwriter?
Bredesen: I think that, in retrospect, has obviously been a problem and an issue. I do know from back then when this was originally put together that they were having difficulty finding people who wanted to give this advice because someone who's a professor in a business school is not likely to want to incur the kind of liability obligations that come with going out and advising on these kinds of things, but there clearly has to be something different. It is a problem to have the same person doing the advising and then selling the products to them. I think that really is probably at the core of what went wrong here.
Q: Is the state obligated to bail out these cities?
Bredesen: I don't think we're obliged to bail them out. Look, the municipalities are only a creation of the state and we have a stake in making sure they're well run and remain whole but I don't think it's gotten to the point of bailing any of them out.
Q: Have any of these cities been in contact with you?
Bredesen: They have not contacted me personally that I'm aware of. I'm sure they've been in contact with things like the comptroller's office to find out what the options are. What's happened with these municipalities, it's not stupidity on anybody's part. These are some of the same decisions made by huge banks being run by very sophisticated people. But in retrospect, they incurred more risk than they should have, just as is true of a number of major banks, investment banks in the country here, and we'll certainly work with them to try to work through it.
Comments (9)
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Has Pith been in touch with any of the 134 legislators that created this mess by putting into law a system designed to make big bucks for their buddies at MorganKeegan and Bass, Berry, and Sims?
Actually, Morgan Keegan served in three roles, not just two. They were financial adviser and bond seller and then they also conducted the state-mandated educational seminars to help municipal officials understand the whole deal. In this role, Morgan Keegan developed the curriculum for the program — a 200+ page book that state officials took only 3 days to approve.
According to the NYTimes report, the curriculum put much greater emphasis on the potential rewards of the bonds than on the possible risks. Municipal officials interviewed for the story said they had trouble understanding how these investments worked. But one guy had one of the most compelling quotes in the story. He said that, even though he didn't comprehend the investment, there was the state seal on every page of the manual. He figured that state officials had carefully reviewed this and given their approval, and if they had approved it, the investment must be OK.
Bredesen is right in the limited sense that the state is not obliged to bail out the affected municipalities. However, state officials (including Bredesen) have to accept responsibility for letting Morgan Keegan serve as both a seller and as a "neutral" adviser -- and for letting this happen with the state's official seal of approval.
Someone correct me if I am wrong, but I believe that the responsibility lies with the General Assembly for creating this program. I believe the Comptroller's Office simply administered the program as established in law.
If I am correct, the state legislature should answer for why it unanimously created a system in which one bank could serve as financial "advisor," underwriter, and "educator" (with the state's seal of approval, no less).
Scooter, the program itself wasn't such a bad idea. I give the legislature a few points for requiring that, if cities were going to be able to offer these kinds of bonds, that they get educated about it. According to the Times article, the Comptroller at the time tried but failed to get "business professors," who would have truly been objective third parties, to run the education program. Failing in that (the article doesn't relate how hard he actually tried), he then turned to Morgan Keegan on the "logic" that the people who work with the program every day would be best able to explain it. Apparently it never occurred to him (or anyone else up there) that it was an inherently bad idea to let the party that's trying to sell these bonds be the adviser and educator, too.
Bredesen and his cronies are flat crooks!
They only took three days to review the document! WTF!
They didn't even read the thing and then the honest bond sellers take all these small towns money and gamble with it ( and guess what we lost!) and Greedesen puts his little stamp on it!
Why in the world are you blaming the fact that teachers won't take that liability! Why don't you have some one your staff? Revenue's staff? The comptroller's staff? Anyone of thousands of people that work for you? I do sell bonds for a living and my job is to sell bonds not teach people!
Can we face some facts here? In 1999, there were very few people apart from investment banking professionals (like Ward Cammack) who understood what was wrong or why it needed to be addressed.
Even in 2007 or 2008, there were very few who knew what was wrong or how to make it right. There were some who sounded the alarm about the mortgage foreclosure increases, and called for better regulation. But I don't think anyone could have predicted the perfect storm of 2008 back in 1999 - any more than someone could have predicted the tornado that hit Murfreesboro on Friday or the hurricanes that hit the Gulf Coast back in September 2008. You know there are risks out there, but all investments bear some risks. And in 1999, the money party was in full swing and we were getting over the Depression-era Glass-Steagall Act, celebrating a new age of global finance and 21st century business. The concerns about Y2K were a much bigger deal in 1999 than any concerns about Mortgage-Backed Securities or bank holding companies or municipal bonds or credit default swaps.
You're right to a certain extent, Benintn. But there was extensive reporting on mortgage problems going back to the early 2000s. It's just that at that time, both banks and public officials were still blaming it all on deadbeats, and most of the media was going along. Yet it's never been good practice to have the adviser and seller be the same guy. It's like trusting a car salesman to advise you on your automotive needs.
