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Aug. 28, 2009 1:33 PM PT _This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts._ The California Legislature gave
Wall Street an end-of-summer gift today. From Bloomberg News: > California lawmakers passed a bill sought by investment banks that > would expand no-bid bond sales, which supporters
say are needed > after the Wall Street credit crisis made competitive auctions more > difficult. The bill allows California’s 58 counties and 480 cities > to sell general obligation
debt through negotiated offerings, in > which the municipality decides in advance which banks will market > it. In competitive offerings, banks submit their lowest > interest-cost
bid on an advertised day. Current law allows > negotiated sales by cities and counties for lease-backed and revenue > bonds and by school districts. The increasing use of no-bid deals
in > public finance has ignited debate over whether it saddles taxpayers > with higher costs, since banks may set higher interest rates on > bonds when they know they have the deal
in advance. Banks have an > incentive to raise the interest rates on such securities, because it > makes them easier to sell, limiting the risk that underwriters will > be left
holding unsold bonds. Wall Street’s argument in favor of negotiated deals is that the certainty involved gives the chosen banks more time to find interested investors at potentially better
rates for the bond issuer. But Bloomberg notes that plenty of academic studies have shown that competitive bidding saves taxpayers money by lowering yields. ‘This is just another very clever
scheme,’ Lee Buffington, treasurer of San Mateo County, told Bloomberg. ‘It’s the good ol’ taxpayers that are getting screwed here.’ Still, California is just going with the flow:
Nationwide, the trend in underwriting bond deals has shifted heavily toward negotiated awards. This year, just 15% of the total dollar volume of new muni bonds was sold via competitive
auctions, according to Bloomberg data. -- Tom Petruno