Friday, December 11, 2009

The $8 Million Business Brief

Posted By on 12.11.09 at 08:32 AM

If an underwriter peddles a public agency's bonds at an interest rate that costs taxpayers millions of dollars — is that a story that should be reported by the local newspaper?

To ask the question is to answer it.

And what if the underwriter is the same guy who owns the newspaper?

That makes the situation touchier, not less clear-cut.

But what if it's simply a big name in the financial field — Bloomberg, say — accusing the newspaper owner's firm of costing taxpayers millions? The accusation might be foolish. It might be false. It might best be ignored. The Sun-Times, a paper with no business editor to guide it to a conclusion of its own, simply reported Bloomberg's accusation, and did so in what was little more than a news brief.

On Tuesday, Bloomberg.com reported that the Metropolitan Water Reclamation District of Greater Chicago had sold $600 million in bonds last August at an "unnecessary interest rate" that "resulted in a bonanza for bankers" and cost tapayers $8 million. Evidence of the underwriter's folly was that hedge funds snatched up a quarter of the bonds and immediately resold them at "a profit of as much as 2.5 cents on the dollar." More evidence was that a week later the Texas Transportation Commission, despite a lower credit rating than the MWRD's, sold off an issue almost twice as large at a lower interest rate.

In Chicago the principal underwriter was Mesirow Financial, which MWRD treasurer Harold Downs said was chosen to handle the bond issue because it had done well by the district in the past. An alternative would have been to put the business out for bids.

The CEO of Mesirow is Jim Tyree, who put together the investment group that recently took over the local chain of newspapers now known as Sun-Times Media.

The Bloomberg article was 1,839 words long. I mention that because the Sun-Times knocked it down to 259 words that ran in the business section. The Sun-Times gave Tyree a little space to defend the deal and closed by noting that he's "an owner" of Sun-Times Media.

The MWRD giveaway — if that's what it was — is actually an old story. The bond issue was in August, and Bloomberg carried its first story on it on August 14. It said what Tuesday's story said: taxpayers got fleeced. Cook County commissioner Forrest Claypool was quoted: “They got a bad deal, if the people they sold to were able to flip the bonds immediately for a higher price. That means they left money on the table.”

In October, Bloomberg carried a withering commentary on the MWRD bond issue by Arthur Levitt, former chairman of the Securities and Exchange Commission. Levitt wrote that around the time our AAA-rated sewer district was selling its bonds priced to yield 5.72 percent, the AAA-rated Johnson & Johnson was selling similar bonds at 5.33 percent. "Had Chicago’s authorities borrowed at the same rate as J&J, they would have saved taxpayers $68.6 million over the lifespan of the bonds." The emphasis is mine. That's more than eight times the savings Bloomberg projected on its own authority.

Levitt went on, "Even so, the treasurer of the district professed himself “really happy” with the net result. It is a common practice for city and state treasurers to put out press releases bragging about how their bond issues have been oversubscribed. That’s like a retailer bragging about how it sold out of merchandise priced at a loss."

At an MWRD board meeting in November, Daniel Kaplan of Wilmette Winnetka, president of Kaplan Financial Consulting, railed against the bond issue. "What is done is done," he said (the written text he sent me closely approximates his spoken remarks). "But I would request the board, please, if you care about the taxpayers, please don’t do this again."

Kaplan urged the board to read Levitt's critique, which he submitted to its members. And he urged it to consider competitive bidding of underwriting contracts. "A competitive sale," he said, "is how the AAA rated Washington Suburban Sanitary District sold its $90 million of Build America Bonds on September 22. Seven different underwriting firms bid on that issue.

"Merrill Lynch thought the bonds were worth 5.09%; JP Morgan thought the right rate was 4.92%; but the winner was Wachovia Bank, which bought the issue at an overall yield of 4.85%...

"Ladies and gentlemen, that is the way the district should be conducting its business."

Say what you will about the Sun-Times coverage of the MWRD bond issue and the Bloomberg attack on it, Tyree's paper has been more responsive than the Tribune, whose only mention I've seen was in its Washington blog, "The Swamp." where Mark Silva posted a precis of the Bloomberg report. If the media seriously covered the MWRD, the bond issue might have become a significant local story back in August. But it's had a life online, as you can see here and here. And now Crain's Chicago Business has picked it up. And an election's coming up: Terrence O'Brien, president of the MWRD, is a candidate for president of the Cook County Board, while a candidate for MWRD commissioner, Todd JohnsonConnor, is running on the strength of his MBA and against no-bidding contracts. In either case, the waste of $8 million (or is it $68 million?) is a sweet issue to wave at voters.

And if the story doesn't go away the Sun-Times will find itself in the unpleasant position of either questioning its owner's business, or defending its owner's business, or ignoring its owner's business. Those aren't great choices.

"We’re just going to exercise our news judgment as we normally exercise it," says editor Don Hayner. This'll happen again, I predicted. "We’ll handle that as it comes along," Hayner said.

When it came to Bloomberg's attack on Mesirow, the Sun-Times's news judgment was pretty much the same as Tyree's. "It is what it is," Tyree told me. "To some people it's a story. There are stories like this about one or another of my businesses all the time. Not usually negative. Usually positive. And I think what people will ultimately realize about this story is that we did a great job for our client."

I reminded Tyree that a week later the Texans got a better deal. "A week in the bond business is like decades in other things," he said. "Minutes matter in how you price. Especially when it's a new product." These were Build America Now bonds he was selling, he reminded me, bonds municipalities can sell at a higher interest rate because the federal government covers 35 percent of the interest payments. They were just created in April, and in August the market was still feeling its way with them. "We were the best by far," said Tyree, and they [Texas] improved it by five-tenths of one percentage point." The $8 million difference, he reminded me, will be spread out over 29 years.

Levitt said it was $68 million.

"That was just plain wrong," Tyree said. "He was comparing it to something completely different."

The fast profit those hedge funds made flipping a quarter of the issue is pretty telling, I said. Tyree had an answer for that too. "First of all, it's way too high of a number -- more like 10 percent," he said. "And they took a bet the deal was going to be done well. They could have just as easily lost a lot of money if the deal wasn't put together well and priced well."

Tyree told me he was surprised I was interested in a bond issue. I said I was interested in the position the bond issue put the Sun-Times in, a position that — he being such a player in Chicago — it'll be in again and again. I asked if he'd given the paper any instructions on how to deal with the story. "Not one," he said. "Not on this nor on anything else."

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