In the News: Recent Developments

Monday, March 3, 2003

He’s part power broker, part grasshopper herder

By Rick Jurgens

Nathan Brostrom, a 39-year-old Berkeley resident with sandy hair and an easy smile, doesn’t look or talk like he’s been in a fight.

But for much of the 22-month bout of political eye-gouging and financial arm-twisting that preceded the $11.3 billion bond sale that California completed in November, Brostrom was in the middle of the ring.

A minister’s son who grew up to be a vice president in the investment banking arm of J.P. Morgan Chase, the nation’s third largest bank, Brostrom now finds a certain nobility in the power bond issue, which was the largest municipal deal in U.S. history. It embodied “all the things I liked about public finance,” he says. “It was this public policy crisis that needed a solution. We were part of forming the solution.”

Money from the bond sale was needed to patch a multibillion-dollar hole left in the California budget after the state stepped in to buy electricity and cushion consumers from the pain of wholesale power prices that soared during the 2000-2001 energy crisis.

California Treasurer Phil Angelides. chose Morgan as the deal’s lead underwriter, a role that would normally entail organizing banks and brokers to sell bonds to wealthy individuals and investment fund managers.

The power bonds were different. “The size of the deal was unprecedented in municipal offerings,” says Eric Leve, a senior vice president with Bailard Biehl & Kaiser, a Foster City financial advisory firm.

Also, California’s governor, treasurer, Legislature and utility regulators had to sign on to ironclad promises to pay bond holders. Lining up all of those autonomous players was a task that one participant compared to herding grasshoppers.

To oversee the undertaking, Morgan tapped Brostrom, a former aide to one-time state Treasurer Kathleen Brown.. To Brostrom, with no deals on his resume valued at more than $500 million, the $11.3 billion bond issue was a “once-in-a-career opportunity.”

But this opportunity came after a devastating loss in his personal life: the death in February 2000 of his wife, which left him a single parent with two small boys. To balance work on the massive bond deal and his family needs, Brostrom relied on a support network that included a live-in au pair, a nanny, family members, his church and colleagues of his late wife, who was a psychology professor at UC Berkeley.

Brostrom, who is now on a four-month sabbatical to recuperate and spend time with his sons, says he got “tremendous” support during a strange and difficult period.

“There were times when I’d be gone for a whole week,” Brostrom says. “I could just tell it took a strain on them.”

And the deal, which was originally expected to wrap up in five or six months, didn’t go smoothly. “There were a lot of tables that got pounded,” Brostrom says.

Wrangling over the bonds continued a running fight among bankers, utilities, consumer advocates and other powerful players with competing claims on the billions of dollars that changed hands during the energy crisis.

Further heat came from officeholders and aspirants scrambling to emerge from the energy crisis as heroes rather than fools or villains.

Joseph Fichera, an investment banker who advised Gov. Gray Davis. during the crisis, recalls Brostrom as “an excellent banker working in a difficult situation with a lot of strong-willed and opinionated people.”

Brostrom describes himself as “an accidental banker.” His father was a Lutheran minister. As a teenager, Brostrom lived with his family in Ethiopia and Ghana. After graduating from Stanford in 1985, Brostrom thought of joining the foreign service but, with a pile of school loans to repay, opted instead to go to work for Merrill Lynch, the giant investment banking and brokerage firm. Brostrom interrupted his banking career in the late 1980s for graduate study at Princeton, where he took classes from former Federal Reserve Board Chairman Paul Volcker. In 1991, Brown, the newly elected state treasurer whom Brostrom met through a mutual friend at Stanford, gave Brostrom a job in her Southern California office.

The next year Brostrom married Lisa Capps, daughter of UC Santa Barbara religious studies professor Walter Capps, who was elected to Congress as a Democrat in 1996. That same year, after their first son was born, Brostrom and Lisa Capps moved to the Bay Area, where she taught at Cal and he went to work for Morgan.

Brostrom’s specialty is municipal finance, a business where bankers and lawyers put together deals in which investors, often seeking tax shelters, pony up money for the government to spend on roads, schools and hospitals.

“Public finance historically has always been a little bit of a backwater in investment banks” without the high payouts in some other areas, Brostrom says. “In baseball terms, we’re sort of singles and doubles hitters,” he says. “We rarely hit the home run, except on a deal like the energy deal.”

Underwriters make money by selling bonds for slightly more than they pay for them. That so-called underwriters’ discount on the power bonds yielded $56.6 million, according to public records. Morgan says its share as lead underwriter was about 45 percent, or $25 million before expenses.

Brostrom doesn’t apologize. “I think we got paid fairly and we got paid well,” Brostrom says. “It was incredibly time consuming.”

Angelides, the treasurer, says Morgan’s bid to manage the offering passed muster with his office’s professional staff but notes that the bank got a boost by assigning the project to Brostrom, who worked on Angelides’ transition team after he was elected in 1998. Angelides, a Democrat, says he knew of Brostrom’s reputation as one of the brightest aides to Brown, his Democratic predecessor and a friend.

Brostrom attributes Morgan’s success in its bid to manage the power bonds to an array of strengths: experience in California and public power, extensive resources, deep pockets and a demonstrated willingness to reach into those pockets to make a deal happen.

Morgan did just that in June 2001, when it extended California a $4.3 billion interim loan that included $2.5 billion of Morgan’s own money. Other big banks backed away from the loan. “They thought it was (priced) too low for the risk they were going to take,” Brostrom says.

The loan was “one of the key criteria in terms of our selection as a senior manager” although not an “overwhelming” one, Brostrom says. Angelides says simply that not participating in the loan wasn’t an option for anyone seeking to run the bond deals: “We made it clear to the lead underwriters that that was an expectation.”

Since 1994 federal rules have limited political contributions by bankers involved in bond deals to $250 and elections in which they can vote. Brostrom gave a $250 contribution to Angelides’ reelection committee on Jan. 18, 2001, the day after a state of emergency declaration by Davis launched California on its power buying adventure.

Brostrom says his donation wasn’t linked to the power emergency. In fact, he says, “I didn’t realize the timing of that.” He had given to Angelides previously because “he’s done a terrific job.” Besides, Brostrom adds, $250 was not enough to influence the allocation of the bond business.

Brostrom’s contribution was barely a drop in the $12.5 million bucket of political contributions reported by Angelides’ 2002 campaign (which included $8,300 from other J.P. Morgan executives and even bigger donations from some other banks).

Brostrom earned high marks for his role in shepherding the deal to completion. “I can’t think of one situation or any aspect of the transaction when Nathan let the team down,” says one member of the team that arranged financing for the bonds, adding that Brostrom exhibited strong analytic and management skills, combined with an exceptionally good political sense.

It’s tougher to measure how good a deal the bonds were for the electricity users who over 20 years will pick up the tab. “The hard work and perseverance put into this transaction resulted in a better deal for ratepayers,” Angelides said in a release that noted that the cumulative interest rate for the borrowing was 4.74 percent.

The bonds clearly benefited from the same low interest rate environment that had homeowners rushing to refinance mortgages. “The market conditions in 2002 were as favorable to do a deal of this size as they could have been,” says Amy Resnick, editor of Bond Buyer, a daily newspaper on municipal finance.

Industry insiders usually assess a deal by the difference, or spread, between the interest rate incurred and the rate paid by the most gilt-edged borrower, typically the U.S. Treasury Department.

One investment banker involved in the power bond transaction credits Brostrom for getting the deal done, but says it didn’t get the lowest possible spread. That banker assigns most of the blame for that to Angelides and PUC Chairwoman Loretta Lynch, whose actions alarmed Wall Street and increased the spread on the bonds, but adds that “the underwriters could have been more forthcoming in explaining the trade-offs” included in the deal.

“We worked hard but the underwriting team was handicapped by its unfamiliarity with the role of state utility regulators, whose cooperation was necessary to craft a guarantee that ratepayers would always be tapped quickly to pay bond holders,” the banker says.

Brostrom acknowledges that that was a problem, especially during the early stages of the deal. “I don’t think I recognized the role of the (state Public Utilities Commission) fully enough, or the Legislature and some of their interests in terms of consumer protection.”

If he had it to do over again, he says, “I think early on I would have spent more time thinking about some of the political and policy ramifications, and not focusing solely on the financing.”

Angelides defends the deal: “Despite a lot of heartbreak on the way, in the end it was very successful.” Lynch declined to comment.

Brostrom, in his final summation, sounds like a minister’s son: “Although we are a bank in the business of selling bonds, there also was this, in essence, higher purpose that everyone on the financing team really embraced and worked toward.”

Brostrom, a former high school basketball player, says the 150 people who put together the deal ultimately worked as a team. “There were definitely times when there was a lot of yelling and tension, but when it’s all said and done I think we all had a common goal and really put personal differences aside to work toward that.”


Name: Nathan Brostrom
Age: 39
Residence: Berkeley
Childhood homes: Cleveland, Ethiopia, Ghana, Orange County
Occupation: Investment banker
Education: Bachelor’s degree from Stanford University and master’s degree from Princeton University
Family: Sons David and Wally

Rick Jurgens covers the housing, development and energy industries. Reach him at 925-943-8088 or at

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