If commercial banks were allowed to underwrite revenue bonds, the result would be concentration of economic power in a few national banks, plus severe damage to regional investment bankers with no demonstrable benefit to the public, according to securities dealers.
On the second day of House subcommittee hearings on a bill that would end the monopoly brokers have enjoyed on these bonds since 1933, Securities Industry Association President Edward O'Brien estimated losses of $330 million for his industry had banks been able to compete in 1978.
Revenue bonds, which are used to finance hospitals, parking facilities and the like, accounted for about 70 percent of the securities dealers' total business in municipal bonds that year. Small brokers would be unable to withstand banks' competition, O'Brien said.
Academic experts called by the securities industry to counter the academic experts called the previous day by the banking industry ridiculed a claim of savings of hundreds of millions of dollars to municipalities if banks were permitted to compete against brokers to underwriter revenue bonds.
Citing faulty methodology, University of Chicago economist Michael Mussa pointed out that the $412 million savings on interest claimed by Columbia University economist Phillip Cagan amounted in reality to only $7 million in reduced revenues to underwriters. The other $405 million was supposed to come from "the increased efficiency and effectiveness of commercial banks in marketing revenue bonds to investors."
Pressed by the committee, Cagan said additional business was expected to come from correspondent banks with which the underwriting banks have relations. Other investors would be individuals willing to accept a lower yield on the bonds in exchange for a Good Housekeeping type of seal of approval, attesting to their safety.
"I have doubts about this seal of approval," said Robert N. Downey of S.I.A., "if it's the same one banks put on real estate investment trusts, Big Mac and Zaire bonds!" Some of these investments resulted in very serious losses for banks.
Of particular concern to securities dealers are the monetary and tax advantages enjoyed by their would-be competitors. Through access to the Federal Reserve window and noninterest bearing accounts, banks can get funds about 15 percent less than brokers. Moreover, only banks can deduct the interest costs of capital borrowed to carry municipal bond inventories.