A Columbia University economist yesterday claimed states and cities could save hundreds of millions of dollars annually on the cost of issuing revenue bonds if banks were allowed to compete against securities brokers to underwrite them.
Testifying before the House sub-committee on financial institutions, Phillip Cagan estimated that localities could have saved between $338 million and $412 million in 1977, or between 1.2 and 1.5 percent of the total revenue issues.
Economists for the securities industry are expected to dispute that claim as the hearings on the entry of banks into the revenue bond market continue today before a House subcommittee on banking.
For the past 15 years or more, subcommittee chairman Fernand St Gemain (D-R.I.) told yesterday's hearing big banks have sought from Congress a wider role in municipal financing. Not surprisingly, big brokers, who underwrite revenue bonds, have sought to keep competitors out of the market.
Breathing new life into this long-smoldering feud is the rapid expansion of revenue bonds. Last year nearly two-thirds of the new municipal issues were revenue bonds, up from one-third in 1965. The dollar value increased tenfold, to $30 billion. Revenue bonds are used to finance schools, utilities and public works.
Banks have been barred from this market since passage in 1933 of the Glass-Steagall Act, which was aimed at correcting abuses of banks dabbling in securities and preventing conflicts of interest. At the time that law was enacted, few bonds were issued. Banks were, however, granted authorization to underwrite general obligation bonds. Today that market is split about fifty fifty between banks and investment bankers.
While most general obligation bonds are awarded to the lowest bidder to underwrite, fewer than 10 percent of revenue bonds are awarded that way. But general obligation bonds, backed by the full faith and credit of the state or locality, have come upon harsh times in the wake of Proposition 13. Because taxpayers refuse to approve these bond issues, municipalities must turn to revenue bonds that are secured only by the proceeds of the particular operation.
Rep. Gladys Spellman (D-Md.), one of 55 cosponsors of a bill to authorize banks to underwrite and trade in revenue bonds, said yesterday: "Competition is the key. All other issues are merely smokescreens. Over 450 securities firms now underwrite revenue bonds. My instincts tell me that increasing by 50 percent the number of firms doing underwriting will increase competition, and that can only be good for the issuers."
On the other side of the table, Rep. James Scheuer (D-N.Y.) expressed strong reservations about allowing banks to underwrite revenue bonds.
Scheuer, whose district contains the headquarters of the securities industry as well as many big banks, expressed concern that competition from the latter might drive some brokers out of business.
Rep. Joseph Minish (D-N.J.) articulated the apprehension of small banks that they could be gobbled up by bigger banks if they got into the revenue bond market.