The 20-year battle between the banks and brokers over revenue bond underwriting authority may come to a head early next week when the House considers the Financial Institutions Regulatory Act of 1978, the so-called "safe banking" bill.
Prodded by the big California banks which are particularly eager to underwrite revenue bonds after the passage of Proposition 13, Rep. Norman Mineta (D-Calif.) has announced he intends to introduce a floor amendment to the massive bill to give the banks this authority.
The brokers, who claim the banks would have an unfair competitive advantage, are fighting strenuously to keep them out and say the tactic represents an end run since no hearings have been held on this question in this season of Congress.
"What the Securities Industry Association is concerned about is that this isn't the way to make good legislation," said Don Crawford, chief lobbyist for the brokerage industry's main trade group. "This is a pretty important issue for the securities industry and it could be enacted without even a hearing."
The banks, in turn, claim they have deliberately been denied hearings in this session of Congress and are backingthis tactic only as a last resort.
"We have tried everthing possible to secure those hearings," said a frustrated Peter Harkins, lobbyist for the Dealer Bank Association which represents about 150 large banks that are most interested in this legislation.
While the issue seems technical, the stakes are large. Underwriting of revenus bonds last year totaled about $28 billion, and accounted for over 60 percent of all state and local government financing. Underwriting fees meanwhile came to over $300 million.
Revenue bonds are municipal debt obligations that are, as their name indicats, repaid from revenues that derive from whatever project is being financed, whether it is a sewer system, highway, electric utility, municipal golf course or even, in some cases, a school system.
By contrast, general obligation bonds are backed by the full faith and credit of whatever taxing authority is issuing them.
Revenue bonds, which once accounted for only a small percentage of municipal financings, now account for the lion's share. And that percentage is expected to grow even more as G.O. bonds look less and less attractive to local municipalities in the wake of the nationwide taxpayer revolt, and the near financial collapse of New York City.
California's Proposition 13 has made it virtually impossibile for communities in that state to issue G.O.s because the initiative requires that any call on local property taxes first get approval of two-thirds of the voters, which is not easy.
In 1960, revenue bonds totaled $2.2 billion, or 30 percent of municipal financings. In 1970, that rose to $6 billion, or 34 percent. Last year the dollar total of $28 billion represented 61 percent of local and state government issues.
Banks were barred from most securities underwriting activities by the Glass-Steagall Act of 1933. The idea behind the prohibition was that bank underwriting activities had contributed to the speculative excesses of the 1920s and the numerous bank collapses of the 1930s.
An exception, however, was made to allow banks to underwrite general obligations bonds in order to help state and local governments meet their financing needs. And banks today account for approximately 50 percent of G.O. underwritings.
The banks have been arguing that it is unrealistic to maintain the ban on revenue bond underwritings, given the changes that have taken place in the marketplace, and they say that the cost of raising money for state and local governments would go down if the banks got this authority.
The brokers argue in response that banks should not be allowed to dominate this area of underwriting business, that any financing cost reductions would only come about because banks have certain tax advantages, that this therefore represents unfair competition, and that any change in the revenue bond rules should only came after a full review of the eentire Glass-Steagall Act.
"We're not talking here about a technical amendment, we're talking about a major revision in the banking law," said Rep. Fernand St. Germain (D-R.I.), chairman of the House Banking Subcommittee on Financial Institutions Supervision, Regulation and Insurance, which reported out the "safe banking" bill. "I feel that members would be hard put to vote for soemthing like this without hearings, and a proper consideration. So my feeling is that the amendment will probably not be offered."
St Germain last week told Mineta he would still hold hearings on the legislation, but Mineta said he decided to go ahead with the amendment because the hearings would come after the "safe banking" bill and another piece of banking legislation are already out of the way, thus eliminating any chance to pass the revenue bond bill as a rider in this session.