A COUNTRY BUILT BY BONDS: A SHORT HISTORY OF THE U.S. MUNICIPAL BOND MARKET AND THE BUILDING OF AMER

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A COUNTRY BUILT BY BONDS A SHORT HISTORY OF
THE U.S. MUNICIPAL BOND MARKET AND THE BUILDING
OF AMERICAS INFRASTRUCTURE

• Presented to
• China Environment Forum Environmental Financing
  in China Initiative
• Paul S. Maco
• Vinson Elkins L.L.P.
• Washington, D.C.

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History of U.S. Public Finance Market

• Debt market in the United States is older than
  the US itself

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Built By Bonds Airports
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Built By Bonds Highways
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Built By Bonds Bridges
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Built By Bonds Waterworks Systems
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Built By Bonds Schools
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Built By Bonds Stadiums
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Built By Bonds ClevelandsRock and Roll Hall
of Fame
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U.S. Municipal Market Timeline Volume
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U.S. Municipal Market Timeline Volume
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U.S. Municipal Market Timeline Volume in 2002

• 430.7 billion in new municipal issuances
• 1.8 trillion outstanding
• Daily trading volume over 8.5 billion
  (average)
• 52,000 (approximate) local and state government
  bond issuers active in U.S.

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U.S. Municipal Market Milestones18401842

• First period of default on state debt
• Prompted amendment of state constitutions
  prohibiting
• Gift or loan of state credit in aid of private
  enterprise,
• Holding of corporate stock by state and local
  governments, and
• Loans and donations financed out of current funds

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U.S. Municipal Market Milestones1860s1870s

• Second period of default, post-Civil War
• Prompted demand for independent legal opinion
  creates bond counsel
• Law firms review documents and proceedings for
  the bond issue and issue an approving opinion
• Only then would investors accept bonds

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U.S. Municipal Market Milestones1921

• Port Authority of New York and New Jersey created
• Allowed debt financing for large infrastructure
  projects with revenue bonds
• No voter approval required
• Not debt of New York or New Jersey

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U.S. Municipal Market Milestones19291930s

• Third period of default, the Great Depression
• 1933 16 of the U.S. municipal market in
  default
• Prompted federal securities regulation
• Securities Act of 1933
• Securities Exchange Act of 1934

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Growth of the Revenue Bond

• Bond Security
• In the beginning A general promise to repay
• Today Revenues from operation collection of
  user fees, rates, and charges
• 1885 1st revenue bond issued by Wheeling, West
  Virginia to finance water and gas plant

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Growth of the Revenue Bond

• Types of Revenue Bonds
• Stand-alone enterprise
• Supplement-supported enterprise
• Government-guaranteed enterprise
• Variations on revenue bonds
• Bond banks
• Bond pools
• Securitization (securitized, structured, or
  asset-backed)

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Changing Debt Market

• Debt purchasers have changed from large overseas
  banks in England, Germany, and elsewhere to small
  individual investors saving for retirement,
  educational, and other purposes
• Individual investors are the largest holders,
  followed by mutual funds, money market funds,
  closed-end funds, bank trust accounts, banks,
  insurance companies, and corporations

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Problems With The Municipal Market

• Repudiation of Debt
• 1880s railroad bonds
• Default
• 1984 Washington Public Power Supply System
  (2 billion)
• Bankruptcy
• 1994 Orange County, California
• Corruption, Hidden Conflicts, Kickbacks

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Problems With The Municipal Market (contd)

• Regulation may reduce but cannot prevent default,
  repudiation, or collapse of a subnational
  government regulation assists investors in
  accurately assessing the risks of default,
  valuation of securities, and financial viability
  of an enterprise or government

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Problems With The Municipal Market (contd)

• Risks change through life of bond
• Credit may deteriorate
• Unforeseeable problems
• Changes in law

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Problems With The Municipal Market (contd)

• Goals of Regulation investor protection and
  fair markets
• The availability of high quality, timely, and
  credible financial information is a prerequisite
  to the development of liquid and deep financial
  and capital markets, which leads to a lowering of
  the costs of capital, the possibility of more
  optimal capital structures, and ultimately higher
  levels of investment

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Regulation of U.S. Debt Market

• Municipal securities are less regulated than
  corporate securities
• Municipal securities regulation is function of
  federalism
• States are sovereign
• Structure of U.S. Constitution (powers not
  delegated to federal government are reserved by
  states)
• States delegate powers to local governments to
  issue debt subject to limits (amounts, purpose)

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Regulation of Municipal Debt Market Antifraud
Provisions

• Primary regulatory tool Antifraud Provisions
  of the securities laws
• Prohibits fraudulent or deceptive practices in
  offer and sale of all securities, including
  municipal securities
• Whenever an issuer makes statements in connection
  with the offering with the offering of a
  municipal security, those statements must be true
  and cannot omit material facts

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Enforcement of Antifraud Provisions

• If information relating to bonds is false or
  misleading
• SEC may file lawsuit
• Private individuals may also file lawsuit if they
  can prove they lost money as a result of the
  false/misleading information

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Enforcement of Antifraud Provisions (contd)

• Basic philosophy government cannot eliminate
  default but,
• Government can reduce risk and enable investors
  to judge risk and protect themselves

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Regulation of Municipal Debt Market Underwriters

• Underwriters are prohibited from buying/selling
  bonds if issuers dont provide periodic financial
  information
• Underwriters are required to provide daily
  transaction information on bonds (price, volume,
  etc.), which is then made public

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Enforcement Examples

• Orange County, California
• Disclosure Fraud failure to disclose facts
  relating to development risk of project, use of
  stale and misleading financial statements,
  misleading characterization of final data as
  audited, and failure to disclose facts that may
  adversely affect the tax-exempt status of the
  offering

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Enforcement Examples (contd)

• Orange County, California (contd)
• SEC brought suit against
• Board of Supervisors
• County Treasurer
• Assistant County Treasurer
• Bond Counsel
• Investment Bank
• All were found to have violated the antifraud
  provisions

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Enforcement Examples (contd)

• City of Miami, Florida
• Violated antifraud provisions when distributed
  misleading annual financial report and
  misleading/incomplete official statements

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Enforcement Examples (contd)

• City of Miami, Florida (contd)
• SEC brought suit against
• City of Miami
• City Manager
• Director of Finance and Management and Budget
• All were found to have violated the antifraud
  provisions

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Thank you,Paul S. Maco

• Vinson Elkins L.L.P.
• Washington, D.C. Beijing Shanghai
• 1455 Pennsylvania Ave., N.W. 20/F Beijing
  Silver Tower 3 Zhong Shan Dong Road
• Washington, D.C. 20004 2 Dong San Huan
  Bei Lu Shanghai 200003, China
• Chaoyang District
• Beijing, 100027, China
• London ? Moscow ? Singapore ? New York ? Houston
  ? Dallas ? Austin

cover photos (clockwise from upper left)
wastewater treatment plant airport closing
ceremonies XIX Olympic Winter Games, Salt Lake
City Erie Canal