2000 Municipal Market Roundtable (Keynote Address)
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U.S. Securities and Exchange Commission

Keynote address

2000 Municipal Market Roundtable
October 12, 2000
Washington, D.C.

United States Securities and Exchange Commission
Office of Municipal Securities

Mr. Lebenthal  – I honestly thought that you were going to say the Chairman because I was going to give my remarks a title. Nobody loves munis more than I do unless it's nobody, but I think it is a contest. I really do believe it is a contest as to whose heart and soul is more deeply involved in this market, and I'm sure that it isn't just a contest between the Chairman and myself. But many of you in this room who are over the last 30-odd years have been in the trenches, and, if not you, perhaps some of your parents have who have been in this industry.

I will say that I have given the better part of a life to the crises of the 38 years that I have in the bond business, and I did other things before that. Tax reform in 1969. Back office crunches of monetary policy. I remember when we used to follow the M's, M1, M2, M3, every Friday and look for some divine augury in those numbers.

Lord knows in New York City, fiscal crisis -- in fact, you know, this is the first time that I have spoken at the SEC without an American flag and a court reporter in the room.


I think I spent longer in the hot seat than anyone else except perhaps the Controller of the City of New York. And, yes, I went through a chastening experience then that has affected my love letters and everything else I write. I do no more insupportable superlatives.

You know, we've been -- I've kind of sat WPPSS out. As a New York firm, we haven't sold that many WPPSS bonds, so that cost us only $90,000 in the settlement. The New York City Housing Development Corporation unauthorized call. Then the Kansas Highway call. And each one of these events have I think expanded the individual investor's tolerance for pain. Now, when a client calls with a complaint, I simply say, "Screwed again."


The Social Security tax on municipal bond interests, and there I got involved in finding somebody to pursue an action against the Treasury Secretary to find the tax on municipal bond interest, or at least the calculation unconstitutional. I will say two levels of federal jurisprudence said in so many words, "Jim, get lost. Get lost."

So I let Grady Patterson, representing South Carolina, undo the constitutional basis for the exemption of municipal bond interest from federal taxation. You can't hang that one on me.

We all remember the day of the week of the Packwood bombshell. I mean to just go through these things. The '86 Tax Act. A bad name, Matthews & Wright, G-37. I did, on the final day of comment, I did write the Chairman a letter that I was going to hold my peace and never say another word about it again. But I had, for the months prior thereto, been going around giving speeches called "The Confessions of a Political Contributor."

Orange County, such a slap in all of our faces. Arbitrage and rebate, yield burning. Finally price dissemination. At any rate, we have been through a lot. I have given a life to this business, and I'm going to tell you right now, I have only one more life to give it, and I am giving it to that market participant to whom I owe my loyalty, and that is the individual investor and my medium of communication, my new medium of communication, will be www.lebenthal.com, which I believe, not just because of what we're going to do, what we started and released the day before yesterday on our new Web site. I believe that we are in one of those paradigm shifts again, here we go again. And this time it's going to be everything the SEC has been trying to do with its might and mane and at last the individual investor is going to demand it of us in a most innocuous faceless, voiceless way through the autonomy of the Internet.

I spoke of paradigm shifts and that just occurred to me frankly this morning, and I called the office and there were some early birds there who faxed me the newsletter that I wrote in 1974 about a paradigm shift and the title of the letter was "The first five minutes of the post-industrial revolution." And here the first couple of paragraphs is an indication of what so many of us have been through, and this may bring back not fond but hideous memories.

"It's disoriented. No leaders, no gas. The money doesn't work. People streaking. The prime at 11 1/2 percent." We had a way to go then. "The prime at 11 percent, 11 1/2 percent. And the dog out in the yard chasing its tail around as the darkness descends at noon. Not since the atomic age went off with a bang has a new era crept on us so quickly from behind with so little that you can sink your teeth into. At least in 1945, we had an eminent Einstein, a formula E = MC2 and a fireball that let you know what's what. But in this case there were no ideals. No spokesman. No divine spark. Just confusion and drift as the old order changes."

Ugly time in America. All right. We are now in a wonderful time. And things as I believe in my heart of hearts are going to change for the good enormously as a result of the Internet, as a result of all of a sudden it being possible that the individual investor can check prices without having to walk into your office and show his face and embarrass himself or herself by saying, "I basically don't trust you."

Trust is going to be forced upon us in many ways. But I hope that as we go into this wonderful and brave new world that we will take with us certain beliefs. And, you know, I am going to talk to you for a while about my beliefs and give you a menu and maybe some of them are feelings that you harbor as well.

This I believe, and that is a borrowed line from Edward R. Morrow, who had a radio program everyday on CBS, and he would interview people and get them to say just what they believed. Well, here's my reply to Edward R. Morrow.

I believe that most of us in this room are in the business of converting people's little rivulets of savings into the stock and bonds that pay for the factories and houses and roads and tunnels and bridges and all those wonderful facilities that get people to work on time and home again in comfort, that increase productivity, that process our effluvia, and recycle things in this land of plenty, back into useful form, that do so much to make this civilized country that we live in the great, great physical plant that it is.

That's what we do. We are a means to an end. And the means that we provide are the financing tools to make this country work, but more than that, we have personal beliefs. We have an obligation, those of us who are in public finance, to make it possible for every American in his capacity as a local taxpayer, a local ratepayer, to borrow for public necessities at the lowest possible cost.

The greatest threat to tax exemption is that wonderful bonanza that we've had recently for the investor where without even taking the tax-exempt feature into account, municipals are yielding so darn close to what it would cost a corporate utility to borrow. The greatest threat to tax exemption is the 90, 95, 100 and then some tax free to taxable yield ratio.

Because the only justification since South Carolina v. Baker for tax exemption is the cost savings to every citizen in the financing of those things that are called res publica, and res publica are the things that nobody owns that we all want that are necessities of public life.

I believe that in a business where yield to maturity, yield to call, yield after de minimis tax, yield after this, is so important. That the yield that is really going to sell insofar as capturing the public's imagination is what somebody once mentioned to me as the yield-implicit in the project. And that is the productive output that you get from a dollar of input in public works.

I remember when we were doing something else that is important to me, broadening the market. When we were participating in the sale of the NYC bond, a mini bond, a zero-coupon bond that could be purchased in a future value of $1000. Investment requires those five/600 dollars. I remember putting up a poster in the subways in reaching the broader-based market, and the poster said, "Put $1000 in, take $2000 out, and pay no tax."

Got a telephone call from somebody who said, "Saw your ad. Put $1000 in, take $2000 out, and pay no tax." How do I get the $1000.


Answer. By somebody else with $1000 investing in productive assets that generate jobs, that generate incomes, that generate savings, that can be spent, consumed, or invested anew.

That is my productivity theory. That is what we are in the business of doing. We are in the business in its broader most lofty sense of raising standards of living in this country and the quality of life, bringing it right down to the bottom line of how people live as a result of investing in these productive assets. Do more than just create immediate construction jobs. But create benefits for generations to come.

Now, I am an amateur videographer. On weekends I go out and shoot little stories as though I had a television program. I just did a video on the Flushing No. 7, which is now a national heritage trail. It is an elevated subway line that leaves the depths of the East River and goes out to Flushing, New York, out to Shea Stadium, and it is the line that John Rocker had made the derogatory remarks about of the passengers who use it.

That line brings to light the drawings, the images, that all of us try to find. For what it is that the bonds do, here is a public investment that has made it possible for labor, for workers, for immigrants, to live close to their jobs, 15, 20, 30 minutes away. That line is a pipeline to my prosperity. Those are my workers. And I remember in scoring this little video. The composer said, "What do you want? Hispanic music? Pakistani music? Columbian? What kind of music do you want?" I said, "Give me the music that Aaron Copeland would write in `Fanfare for Americans.'"

And that is what these dumb bonds are to me. That is what we do. We make this. We make the American dream work and what is the American dream? The American dream is simply that each generation will do better than the previous generation. And these tools of production, these tools of productivity, subways, roads, bridges. The bridge that leaps the river, that makes it possible for people to get to work, and be near their jobs, or conversely, to the factories and the plants to move out of town, where a labor supply can come to them. That is what it's all about.

Let me tell you a couple of other beliefs and desires and wishes that I will take with me into this next life that I am giving to the bonds.

Broadening the market. Broadening the market. Oh, incidently, 4 1/2 percent of American taxpayers love us. That's what the paltry ownership is of municipal bonds. 4 1/2 percent of taxpayers. 4 1/2 percent of taxpayers are carrying the load for the rebuilding of America. I want to expand that to 5 1/2, 6 1/2.

Well, I have been running ads, as many of you know, until I'm red, white and blue in the face, trying to talk the virtues of the bonds, and no unsupported superlatives. And I will say that's well as those ads have been, poetic as the copy, persuasive as the sizzle, rich as the facts, great as disclosure has been, and my God there is fantastic information out there.

We have had a failure to communicate. And it isn't your fault and it isn't my fault, and it isn't anybody's fault. People will not read. They will not read especially the information that they claim that they don't understand, they don't know, and there's a reason why they will not read our stuff. And I put on my Web site lengthy research reports. I don't measure what the readership has been, but I'll tell you this. That nobody has ever caught me on any of the typographical errors I've had. They mortify me when I occasionally catch one. I don't even read them. That's not true.

There's a reason why people will not go to the lengths that they should. You know, there ought to be a law, not that we disclose, but that the investor read what we have disclosed and sign off that "I've read it."

Here's why they won't read. In a world of immediate gratification, of doubling your money. Now, that has changed in the last six months perhaps. But in a world where the motive for investing has been to make money, profits, gains, it is hard to get somebody to read a 10-page report on the Nassau County Interim Finance Agency, where at best you may see, depending on what market conditions are when they come, you may see 5 5/8 percent. Yes, tax-free. But 5 5/8 percent tax free against 20 and 30 percent that we're shooting for in these other markets, is hardly an enticement to do your homework and read.

So how do we make this essential investment? How do we ingratiate it into the mainstream of people, of investors' lives? One is by dwelling somewhat on purpose -nobody buys bonds out of love for the hometown sewer system. But at least knowing how, built by bonds, that's what these things are all about. It helps make a connection, a link.

In New York, for a number of years, we ran what I called our "Infrastructure Series." "Love my sewer, love my bonds." "Love my towers, love my bonds." "Love my subway, love my bonds." A marvelous series. A marvelous series because it got people's interest in the subject but not enough.

Believe it or not, at the ripe old age -- I'm now 72 -- at the age of 70, I discovered Markowitz & Siegel and modern portfolio theory. Why you people kept this a secret from me all these years. Because there is the raison d'etre for a municipal bond being in the portfolio of every investor in America. And that is the balanced portfolio. It is the management of risk, and isn't it interesting how every time the stock market takes a dive, our telephone board lights up with bond buyers.

In the principle of modern portfolio theory, that through diversification and time, diversifying the money truly diversifiable non-correlated instruments. That one can -- gosh I've got to be careful how to say this, because I do use words seek, reach for, try, poke, goal, but one can seek to increase return without necessarily increasing risk commensurately or reduce risk without reducing return commensurately.

And when a client called and said, "Lebenthal, for two years you've been talking to me about reducing risk, and saying and saying it," and I say, "Aha, you haven't given it enough time." And if he calls two years from now, I'm going to say, "You haven't given it enough time." But given enough time, and truly diversifying, history has created an expectation -- and I might suggest that out of this meeting today we find some new way of wording a latent hypocrisy in the disclaimer that "past performance is no indication of future results."

They gave the Pulitzer or Nobel Price to Markowitz for precisely the creating of more legitimate expectations about the future. And history does tell us certain things. It may bring expectation into life with the reality that has occurred in the past and we've got to work something out there, because every time I go through that line, and I, incidently, never add a buck to it. I accept it as it is. But I really feel that I am praying to a false god when I do it, but that line needs refinement in the light of so much that is happening in the investment culture, about creating reasonable expectations from the past performance of markets.

But let's move on. I do think that asset allocation, management of risk, modern portfolio theory, complicated as they are, have a certain to me a cultural ring as to why stock buyers should own municipals and municipal buyers should own as part of a balanced portfolio equities. That may broaden our market.

But nothing is going to broaden our market more in my opinion than the Internet. Because at last the investor has autonomy. Not anonymity. I have something on our new Web site that I love. I have spent -- and if I seem out of touch, if my remarks seem this guy's been asleep for a couple of years -- it's because for the last year and a half I have been hunched over my work processor doing portfolios for people who have been sending in from all over the country, who have been sending in the most wonderful detailed profiles of themselves -- and not the sort of profile, if you want a triple A, double A, you want this or that. I don't ask those questions, because they don't know the answers.

But I ask them questions about themselves, their goals, their needs, and from that I have been doing exactly what your heart surgeons, your hernia surgeons, and whoever else has recently operated on you has done. You get wheeled in on a gurney to the room. You meet him for the first time. You've got magic markers all over your belly, and they cut, because they know who's doing, you see in the X-rays. You see in the profile. He knows what you are. He doesn't know what you do. Maybe in the recovery room that he may ask you what you do and you say, "I'm a municipal bond salesman." And he kicks you out.

But for a year and a half I have been that surgeon doing these portfolios for people that I've never met. Reluctantly I have asked them their occupation, because I'm curious about what people do. But everything else that I wish I had known for all of these years about the people to whom I have been selling bonds face to face, I now have in front of me.

And after that year and a half, I've done something -- well, I haven't heard of anybody -- and this is the old orange Robert L. Ripley "Believe it or not" book. There was a guy who actually called himself "Fingernail, hair," and what have you, and just horrible things. But he made an effigy of himself out of himself. I have been cloned into a computer.

And these portfolios are now being done by machines. A living monument to me, and I look at them, every one of them, and if one has gone a little berserk, I will quickly send out an e-mail correcting it, but it's a delight to me, it is absolutely amazing, to see what one can do to match bonds to people.

I have promised myself that I was not going to use the word, the "S" word, suitability. But that's what this thing is all about. But suitability is not something being forced down my throat. Suitability is a marketing plus. It is something that all of a sudden is going to show a sensitivity to the client. Not something I'm trying to sell. And incidently, it's a wonderful thing to be able to walk in, seemingly anonymous -- whatever anonymity is -- but with the autonomy to say who you are, what you think you need from investments, and to get a portfolio.

Our site, and we've only just begun marketing it on radio, and there is a television commercial, our site dwells on the proposition that we've going to match you up with bonds that fit, and up on the screen will also pop the face and voice of something at Lebenthal that you can talk to when you're good and ready.

Isn't that marvelous? That is what -- not me, but that "good and ready" phrase, so patches up what is happening with the Internet in so many areas. It really puts the ball in the investors' court.

So I anticipate wonderful qualified leads coming back. People calling that broker. Oh, incidently, I'm sure I'm getting a lot of "Have you got Prince Albert in the can? Well, let him out." I'm sure I'm getting a lot of those hits. That's fine, because I'm not going to waste my time anymore dialing around America at the dinner hour trying to find somebody who wants to buy $100,000 Nassau County Interim Finance Authority bonds.

Maybe the cold call is dead. Maybe it's not dead. Maybe the cold call is going to come the other way. Maybe what we have invented, those of us who are going to be using the Internet, is a municipal bond 7-Eleven Store. The 7Eleven Store does not call you at midnight and say, "Do you want a quart of milk?" You know where you can go at midnight to get a quart of milk or a Torpedo or Submarine or whatever, at 7-Elevens.

So there will be cold calls. I hope they come in the other way. I hope this market broadens. I hope that we extend the face of municipal bond ownership. And the reason I hope that is it's going to mean income to Lebenthal, but it's also going to fulfill my dream of bringing down the cost of borrowing for issuers and for every taxpayer in his capacity as a local taxpayer or rate payer.

I see various things happening as a result of this wonderful new world of the Internet. Some good, some may be bad. The SEC has broken its neck to get this industry to have greater transparency on price. And it's there. It's on Tradinginbonds.com. And I see spreads and I wish I was working for it. I don't know who's visiting the site. I don't know whether investors are looking at it yet. I've only had one person question us on the offering of bonds, a major, major investor, that as a result of his questioning, brought our spread in the bond down to somewhere between an eighth and a quarter. I'm not exactly sure, but this was an individual investor, who had checked.

What is going to happen when all of our prices are up on the screen. Because when the engine drivers, the inventors of these inventory systems that are going to let you have access to everybody's inventory all across America and put it on your site, they all kind of suggest and can move the market up. We ain't going to be marking up bonds. We are headed for a period of marking down. We are headed for a period in which the municipal bond industry, as every other industry, that has played with the Web, it's going to be free bonds. It's going to be no-spread pricing or damn little pricing, or damn little spread.

And so changes may come. We may all be working for a fee. But there's a fee per transaction, whether it is managed fees or what, but that's going to come.

Something else is going to come. And the way to avoid it is just be so darn good on your Web site, to be so sticky that I do such fabulous tutorials and make information not only accessible but fun to get. If we don't do this, the following may happen.

Some issuers, as already Pittsburgh started doing, but some issuer is going to say "Why not just keep the window open all the time and let me know what materials we may need and homogenize the product." The product is going to change to fit this new pipeline. And simply go directly to the issuer.

How it gets paid? How does that work? -- my pretty head about the business or the business. Only about what I think are possible developments that could happen as a result of market demand and making bonds easier to buy.

I think we are not like this terrible time in 1974. I'm also willing to concede that these times are not times of virtual prosperity, but times of real prosperity. I'm willing to concede that. -- -- have to be somewhat dour. But it's getting through to me. And I think we're going to have a great, great time broadening the market, positioning the municipal bonds as what they are, part of a balanced portfolio.

Yes, the tax-free virtue will survive as long as it is worth the while of issuers to borrow in the tax-free market. And as a result of increased volume, we'll both make money on the volume as well as bring the cost of borrowing down, which I think is our first obligation for the building of the great public works in this country that make it a great country. I hope, I hope, I hope.

Thank you very much.

Ms. Haines  – We'll take a 15-minute break now.

(A brief recess was taken.)


On to Panel 1...


Modified: 03/21/2001