In the News: Recent Developments

February 27, 2008

Bond Marketer Criticizes Firms Over Auction-Rate Securities

By Randall Smith and Liz Rappaport THE WALL STREET JOURNAL, Page C2

The head of a New York state agency that markets bonds for about 250 universities, hospitals and other institutions blasted securities firms for pulling back from the auction-rate securities markets. David Brown, executive director of the New York State Dormitory Authority, said the agency aims to shake up its roster of underwriters for more than $4 billion in annual municipal-bond issues in order to improve auction results.

“As a whole, this is not the finest hour of the investment-banking community,” Mr. Brown said. Auction dealers “are refusing to make a market in the securities, saying publicly this product is dead and everyone has to get out of it,” then recommending debt restructurings “where they will earn yet another investment-banking fee.” Auction-rate securities are long-term bonds that act like short-term debt, with interest rates reset in auctions held daily, weekly or monthly by Wall Street dealers. The $330 billion market became a casualty of the credit crunch two weeks ago, when some dealers pulled back, boosting the rates paid by many bond issuers.

“Without any warning and simultaneously, the brokers stopped participating in the market,” Mr. Brown said. Wall Street executives have defended their conduct, saying losses on holdings such as mortgage assets have curtailed their ability to use their balance sheets to support faltering markets.

Mr. Brown, when he was a deputy to New York Attorney General Eliot Spitzer, now the governor, led a probe of mutual-fund trading abuses that led to nearly $3 billion in penalties against brokers and money managers. Mr. Brown said he didn’t inform Mr. Spitzer in advance of his plans to criticize Wall Street securities firms.

Gov. Spitzer often was at odds with Wall Street while attorney general. His top insurance regulator, Superintendent Eric Dinallo, has recently proposed a plan to recapitalize bond insurers that has been criticized as favoring local governments over Wall Street firms. The dormitory authority, created in 1944 to finance post-war housing for returning soldiers, markets municipal debt for such high-profile institutions as Memorial Sloan-Kettering Cancer Center, Cornell University, New York University and Rockefeller University. All four of those institutions have had recent auction failures.

The state agency, which oversees $35 billion in bonds and manages $6 billion in nonprofit construction projects, also released a list of $1.3 billion in auction-rate issues by 11 of the institutions, saying most of them had suffered auction failures. The list was studded with top Wall Street dealers, including Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Citigroup Inc., Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Holdings Inc.

Other auction-market participants have criticized the pullback by Wall Street firms. Issuers counted on them to step in “to achieve the benefits of the market,” says Bill Rogers, chief financial officer at Sierra Pacific Resources, a Nevada power company that has had auctions fail. He said recent events have made his company “more skeptical of our broker dealers and our investment banks’ commitment to us and our capital formation requirements.”

—By Randall Smith

Write to Randall Smith at and Liz Rappaport at

© 2008 The Wall Street Journal

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