The words are flat, bland -- no sweetness, nor fire, nor hint of spice in them.
But mention revenue bonds to a big banker and often as not he will salivate like a dog coveting a steak bone.
The nation's brokers have been digging holes all over Capital Hill for nearly two decades to hide those revenue bonds from the bankers.
Revenue bonds are big business. At stake are hundreds of millions of dollars of fees. The banks want in on that business. The brokers, who have it already, want to keep them out.
"State and local governments issued $29.6 billion of revenue bonds last year and $28.2 billion of them in 1978. Unlike the so-called general obligation municipal bonds -- which are backed by the "full faith and credit" of the issuer -- revenue bonds are backed by some specific source of income, such as tolls from a bridge or highway or a specific tax set-aside.
More to the point, at least in this case, banks and brokers can underwrite general obligation bonds, but banks, with certain exceptions, cannot underwrite revenue bonds.
The banks didn't care much for a long time. But for the last 17 years or so, they have. Revenue bonds used to be the exception to the municipal financing rule. Today, 70 percent of all municipal bonds are of the revenue variety, up from 61 percent in 1978 and less than a third in 1970.
"It's one of those fights that doesn't command the center stage, but banks and brokers have been waging an increasingly bloody backroom battle in the halls of Congress," said one lobbyist not directly involved in the fray.
In one corner are the giant banks and their lobbying arm, the Dealer Bank Association. Most small banks don't care about underwriting revenue bonds, and the Independent Bankers Association (made up of small banks) opposes giving the giant banks any more power.
In the other corner are the nation's securities firms and their lobbying agency, the Securities Industry Association.
The Senate Banking Committee has been in favor of letting the big banks in on the game, and several times during the past 17 years the Senate has passed bills to that effect. But the House subcommittee on financial institutions does not think the banks have proved their case. Although the subcommittee held hearings on the question a year ago, Chairman Fernand St. Germain, with the backing of most members of the subcommittee, has refused to prepare a bill for the floor.
Unable to get a bill from the House Banking Committee bank lobbyists and their allies have made several attempts over the years to attach revenue-bond authorization to other pieces of legislation.
Lobbyists for the brokers spend much of their time searching out these attempts, then trying to block them. Three times in the last two months securities lobbyists sniffed out amendments to bills that would give banks revenue-bond underwriting privileges and three times have killed the attempts. One of those most recent attempts was to attach an amendment to a bill on goose down feathers pending before the Senate Finance Committee.
The banks argue that if they are permitted to underwrite revenue bonds, all sorts of good things will happen: There will be more competition, lower costs to municipalities and a generally healthier environment for municipal securities.
The brokers contend that the cost savings will be negligible and that banks have such advantages in obtaining funds -- not to mention tax advantages -- that brokerage firms especially the small regional ones that specialize in municipal securities, eventually would be run out of business. Less competition would be the inevitable result, they say. More than 600, and perhaps as many as 1,200, brokerage firms underwrite municipal bonds.
The genesis of the struggle goes back to 1933, the year that Congress passed the Glass-Steagall Act. It was in the wake of the Great Depression and the stock market crash, an episode in which bank securities departments were thought to play a major role.
Glass-Steagall established a strict separation of commercial banking -- the taking of deposits and the making of loans -- and investment banking -- the underwriting of new stock and bond issues.
But a clear separation to Congress, even back in 1933, was fuzzy. A lot of cities and states were in trouble and Congress felt they would need the help of the banks to sell their bonds. As a result, the Glass-Steagall Act had one exception to the prohibition against commercial banks becoming investment banks. Commercial banks were permitted to underwrite -- buy securities from the issuer and sell them to the public -- general obligation municipal bonds.
In 1933, most municipal bonds were general obligation. One of the cases the banks make is that Congress did not allow them to underwrite revenue bonds because revenue bonds basically were unheard of. "They represented between 2 and 3 percent of total municipal offerings in 1933," according to Amos T. Beason of Morgan Guaranty Trust Co., one of the big banks that wants in.
However, revenue bonds were not unfamiliar, either.
Around the turn of the century, Chicago sold revenue bonds to finance its water department. Many of the bridges and tunnels in the New York area -- including the George Washington Bridge and the Holland Tunnel -- were financed by revenue bonds. And a number of other cities and states used revenue bonds to finance waterworks and public electric utilities.
As inflation began to wreak havoc on the budgets of state and local governments, as the electorate became more restive about approving bond issues and as federal sewer construction programs began to demand that local governments charge user fees, revenue bonds began to displace the general obligation bond.
Congress has amended the Glass-Steagall Act a number of times, when it felt bank participation in some types of revenue bonds was needed, especially for housing purposes.
The growth of revenue bonds creates a number of public policy questions, according to Richard Still, staff director of the House subcommittee on financial institutions. To whit, if voters do not want to spend any more of the community's general funds on this or that project, are public officials subverting the will of the electorate by creating special taxing authorities or fee structures to replace general obligation fund raising?
That general policy question, however, is not one that banks or brokers choose to deal with. Despite all their high-sounding rhetoric, the bottom line is dollars.
And those dollars are laid out by the cities, states and counties in fees and spreads (the difference between the face value of the bond and the lower price at which the underwriter buys it. The underwriter makes money off that spread).Most of the local government associations support the bank position on the theory that with more potential underwriters, spreads will narrow.
The bankers -- about 165 of the nation's 13,000 banks are members of the Dealer Bank Association -- have marshalled their economists to show that local governments would save hundreds of millions of dollars. But a withering-retort study by the Securities Industry Association questioned nearly every result of the bank study.
"You come away scratching your head. Our position is that it only stands to reason that if there is more competition there shold be more savings," said John Shirey, legislative counsel to the National League of Cities.
Even if there are some savings, said Still, there are other costs. Many of the nation's smaller brokers who depend heavily on their underwriting income from municipal securities might be devastated. The Securities Industry Association estimated that brokers would lose $350 million of income and that the impact would be heaviest not on the Merrill Lynchs but on the regional brokers with close ties to their communities who depend upon municipal underwritings for a third or more of their business.
"Should we rely upon the good will of the big banks to stay in the municipal game during hard times when their strategy is to seek out the highest-yielding investments? Despite their desire to get into revenue-bond underwriting, the municipal departments of big banks do not contribute much to overall profits," said Still.
Peter Harkins, executive director of the Dealer Bank Association, said the fear that banks will force brokerage firms into bankruptcy is a canard. He said banks and brokerage houses have collaborated for years in underwriting general obligation bonds and do so today on revenue bonds that are bank-eligible.
Furthermore, he said, local banks and brokers like to work with each other rather than with the powerful banks in New York and Chicago.It is unlikely, he said, that New York banks would put local brokerage firms out of business.
"North Carolina is a good example," Harkins said. "North Carolina banks and brokerage firms like First Charlotte already combine in [bank-eligible] revenue bonds. Local brokerage firms have the financial capabity to seek out deals. Local banks have strength in distribution and capital."
But the Securities and Exchange Commission, which has not opposed opening up the market but does not give the notion noticeable support either, estimates that regional securities firms would suffer.
Roger Mehle, of Dean Witter Reynolds who heads up the fight for the Securities Industry Association, said that banks have such big advantages in obtaining capital -- and at a lower cost that brokerage firms -- that brokerage firms would find themselves hard-put to compete. "I don't want to compete in an already competitive industry where we will lose business," he said.
The House subcommittee's Still noted that throughout the whole history of the revenue bond struggle, no one has ever made the case that a municipal bond issue could not come to market because there was no underwriter. m
He said that his boss, St. Germain, once was a supporter of the banks but that in the last eight or nine years has changed his mind. He said St. Germain is convinced the separation of banks and commerce is a sound one and that the banks have not "sustained their burden" of proving that the wall should be breached in the revenue bond question.
Sen. William Proximire (D-Wis.), chairman of the Senate Banking Committee, takes the other tack -- as does Rep. Henry S. Reuss (D-Wis.), chairman of the House Banking Committee. The brokers have a monopoly, and it is up to the brokers to prove that they should maintain that monopoly.
But Reuss has not seen fit to force St. Germain to come up with a bill. Proxmire periodically thinks of attaching a bill to some other piece of Senate legislation (the last time the full Senate approved a revenue bond bill was 1974). But in this session, he has made no decision what to do according to Kenneth McLean, the staff director of the Senate Banking Committeee.
Meanwhile, the lobbyists for the banks and the brokers are in a standoff.The banks drool, but the brokers have been able to protect what they feel is rightfully theirs.