An Aug. 29 Washington Business article about a major underwriter of bonds for the District incorrectly said that the investment bank M.R. Beal & Co. made a $5,000 loan to the 2004 campaign of D.C. Council member Marion Barry (D-Ward 8). Barry, a paid consultant to M.R. Beal at the time, made the loan to the campaign himself. M.R. Beal, in turn, disclosed Barry's loan to the campaign in a filing with the Municipal Securities Rulemaking Board. (Published 8/30/2005)
A decade ago, the District of Columbia government was a hard sell on Wall Street. The city budget was bleeding red, all three major credit rating agencies had demoted the District's bonds to junk status and voters had just reelected a mayor who had been jailed for crack cocaine possession.
"Those were the bad old days," said Bernard B. Beal, chief executive and founder of M.R. Beal & Co., the oldest minority-owned firm in continuous operation on Wall Street and a major underwriter of bonds for the District and the Washington Metropolitan Airports Authority.
But now an eight-year string of budget surpluses, recent upgrades from the major credit rating agencies and an expensive agenda that will require major financing, including the new baseball stadium, have made the District a hot client for Wall Street again. Financial firms earn hefty fees in the $2 trillion municipal bond market in return for taking on the risk that they will not be able sell all of the bonds to investors. They can also earn large fees for advising cities on big transactions.
Last fall, Beal's firm led a $200 million general revenue bond offering for the District that cost the city about 4.54 percent in interest, much less than the city paid to raise money in the junk bond era when rates ranged above 6 percent. Beal and his colleagues took D.C. officials, including chief financial officer Natwar M. Gandhi and city administrator Robert C. Bobb, around to big institutional investors, many of whom would not touch D.C. bonds in the mid-1990s, to sell them on the District as a safe investment.
"Everyone seemed very happy with what's happening down there," Beal, a soft-spoken 51-year-old, said of the District in a recent interview in his offices at 110 Wall Street, two blocks from the East River. "I still think the market prices the city's bonds too cheaply, but the city now has the lowest cost of capital since the control board days."
Deutsche Bank has also gotten heavily involved with the District in recent months, drawing up a plan to provide $246 million for the baseball stadium in return for tax receipts from in-stadium concessions such as food, beverage and merchandise sales.
But the District's fiscal re-emergence is especially good news for Beal who, like a small group of other African American bankers, built his firm into a small but profitable investment company largely on the strength of underwriting business for big cities with large minority populations, such as the District, New York and Atlanta.
D.C. Council member Jack Evans (D-Ward 2) said M.R. Beal initially got District business because it was minority-owned but has since performed as well as any of its bigger Wall Street competitors. "They are part of our minority contractors program," said Evans, who heads the council's Finance Committee. "But they have also done a very good job for us in terms of getting us excellent rates on our bonds."
M.R. Beal first made major headlines in Washington for its relationship with the political figure Wall Street associates with the District's fiscal decline: former mayor and current Council member Marion Barry (D-Ward 8).
M.R. Beal hired Barry as a consultant in 1999 after his second stint in the mayor's office. According to disclosure forms filed by the firm, it paid Barry about $250,000 in retainer fees, commissions and expense reimbursements from 1999 to 2004 for his help in getting business from the District and other cities. The forms also indicate that the firm made at least one $5,000 loan to Barry's latest council campaign.
The forms list Barry as helping bring in a handful of business from the District and other big cities, including bond offerings from the airports authority and the District of Columbia Housing Finance Agency and advisory work for the District of Columbia State Health Planning & Development Agency Safety Net Project. Initially, the firm paid Barry a $5,000 per month retainer but later cut that amount in half.
The consulting arrangement ended when Barry was elected to the council last year. "Orange is not my favorite color," Beal joked, referring to the prison jumpsuit he would have to wear if he continued to make payments to Barry in office.
Beal and his deputy, M.R. Beal president and chief operating officer Stanley E. Grayson, a former New York City deputy mayor, said the firm hired Barry and other consultants because of their connections to elected officials who make decisions on awarding underwriting business and because of their savvy about how to make proposals most appealing to lawmakers.
Most municipal bond deals are "negotiated transactions" in which issuers such as the District government pick a group of underwriters rather than giving business to the bidder charging the least. So connections are critical. "The consultants helped keep you keep on top of what was going on on the ground, what kind of deals were available," Grayson said.
But the use of paid consultants such as Barry has been controversial, and the practice is banned under an industry rule that went into effect today. After initially requiring that firms disclose only the names and amounts paid to their consultants, the industry's self-regulating body decided it was too difficult to track what the consultants did with the money and how much found its way into the pockets or campaign coffers of elected officials.
In fact, corruption has often seemed a regular feature of the municipal bond market. M.R. Beal has not been untouched.
In 2003, a grand jury indicted Tyrone Smith, a former board member of California's West Basin Municipal Water District, for extorting $25,000 from M.R. Beal in return for his vote in favor of awarding an interest rate deal to a firm for which M.R. Beal acted as an adviser. Smith pleaded guilty and was sentenced in March of this year to 24 months in prison. According to the indictment, Smith received the money in $5,000 cash bundles from former Inglewood, Calif., City Council member Garland Hardeman, who was at the time a paid consultant to M.R. Beal.
Beal said he was completely unaware of the payoffs to Smith. "I really don't know exactly what went on there," he said. "My hope is that everyone involved gets what they deserve, it's been a real headache." Federal prosecutors are continuing to investigate multiple potentially questionable municipal bond deals around the country.
After initially opposing the rule banning consultants, Beal and Grayson said they now support it, though they acknowledge it will probably force them to hire more staff to keep tabs on potential bond deals.
Beal grew up in the gritty South Bronx and founded his firm in 1988 after spending nine years in municipal and corporate finance at the firm then known as Shearson Lehman Hutton. In the name M.R. Beal, the M is for Manning, his oldest child's middle name; the R is for Rose, his wife's middle name. Beal's firm grew quickly, capitalizing on programs put in place in big cities to steer significant underwriting work to minority and women-owned firms.
Several other firms founded in the era, such as W.R. Lazard and Grigsby, Branford, are no longer in business or have combined with other underwriters. Some minority-owned firms failed to expand beyond set-aside programs. Others got swept up in scandals. "Some of those firms thought the light would never shine on them and when it did they couldn't survive," Beal said.
M.R. Beal helped manage $37.8 billion in municipal bond sales in 2004, up from $36.4 billion in 2003. Through June 30 of this year, the firm has helped managed $15.8 billion in bond deals, including the lead management role in a $250 million general revenue bond offering this month for New York City. Underwriting firms battle fiercely for the lead management role, which carries the most prestige and the heftiest fees.
According to data from Thomson Financial, M.R. Beal is the 18th biggest underwriter of municipal bonds, just behind another minority-owned firm, Loop Capital of Chicago. The top of the list is dominated by Wall Street's biggest names, including UBS Financial Services, Citigroup, J.P Morgan, Morgan Stanley and Bear Stearns. M.R. Beal, which is privately held, does not disclose detailed information on its finances, including how much it has collected over the years from the District. But according to Beal and industry insiders it turns a tidy profit. "It's a very strong, highly regarded firm," said William Hayden, senior managing director in the municipal bond department at Bear Stearns.
While M.R. Beal still depends on municipal bond underwriting for 75 percent of its revenue, the firm is making a renewed push to break into the world of corporate stock and bond underwriting, an arena still dominated by the biggest brands in the industry. The firm recently added six new equity sales and trading executives in its Chicago office, all of whom came from rival Loop Capital.
Beal and Donna Sims Wilson, the firm's new head of equity sales and trading, said they hope the added muscle will help convince corporate America that the firm has the capacity to sell new stock and secondary stock issues, especially to smaller investors such as boutique money-management firms and family trusts. In a telephone interview from Detroit, where she was pitching M.R. Beal to a potential corporate client, Wilson said, "Those are the type of investors that are often ignored by the Goldman Sachs of the world."