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Wednesday, April 17, 2013 2:17 PM

Muniland Disclosure Problem; Philadelphia's Closed-Door Two-Day Schmoozefest Backfires With Unwanted Publicity

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I received several emails regarding my post Philadelphia, 5th Largest City in US is Effectively Bankrupt; Mayor Holds Closed Meeting With Wall Street to Discuss Asset Sales.

The emails were from disgruntled people hoping to leave the area for the usual complaints: unions, schools, crime.

One reader sent a link to a Philly.Com article by Joseph N. DiStefano titled Philly effort to keep well-known troubles quiet wins new attention.

Philadelphia's closed-door two-day schmoozefest with 100 bond underwriters and other would-be lenders keeps generating unwelcome publicity for the nation's brokest big (million+ resident) city.

"Retail investors own about 50 percent of municipal bonds directly and another 20 percent through mutual funds. If the media is not allowed to attend the [Philadelphia debt] conference, then retail is at a distinct disadvantage," scolds Cate Long for Reuters.
Muniland Disclosure Problem

The link to Cate Long's article was broken (it may be fixed now as I notified DiStefano), but I traced it to Muniland has a disclosure problem.
There is a glaring gap in regulation – called Regulation Fair Disclosure – when it comes to protecting municipal bond investors. It appears that issuers may be in the habit of giving material nonpublic information to preferred institutional investors, while making retail and non-preferred investors sit out in the cold. Exhibit number one is the treatment of media members who have petitioned to attend the City of Philadelphia bond investor day scheduled for this Thursday.

Philadelphia Inquirer’s editor, William Marimow, said that the issuance of new bonds is public business. But what about all the retail investors who own Philly bonds? Retail investors own about 50 percent of municipal bonds directly and another 20 percent through mutual funds. If the media is not allowed to attend the conference, then retail is at a distinct disadvantage.

Dribbling out information to select bond investors is a terrible way of building a broad base of support for a municipal issue. All investors want transparency. When they don’t get it they will pass on buying a bond or demand a lower price and higher yield.

My guess is that issuers like Philadelphia and Puerto Rico are afraid of what enterprising reporters and bloggers can unearth about how they manage their public finances. But it’s the people’s finances. When you do it in dark places, sloppy things like “insufficient documentation” seem to happen. Open up to all investors and show muniland that you have nothing to hide.
My guess is Cate Long's guess is correct. By attempting to hide the facts and/or placate institutions, the city just made matters worse.

DiStefano continues ...
"Sam Katz, the former [muni bond] adviser who now chairs PICA, the state board overseeing city finances, said investor conferences were typically designed to permit candid conversation" between city officials and bond buyers and sellers:"You might want to say something to them that you don't want to say publicly."

Still, "where the city's headed is very much the public business," and the public would be better served if the meeting were televised, Katz added.

By closing the meeting, the city and its advisers have managed to draw more attention to its problems. It doesn't help sell bonds, especially to small and retail investors, when news accounts result in up-country investment advisors like Mish Shedlock, of Sonoma, Calif.-based Sitka Pacific Investments, telling his clients that Philadelphia "is effectively bankrupt" and likely to default, that city borrowing costs are "likely to soar," and that "the city is nothing but a walking zombie now."

Maybe Katz is right: Let the public watch. Better to bore potential retail bond investors, than leave them to be alternately starved and terrorized.
I had no particular focus in watching Philadelphia. I do now, and so do fellow bloggers thanks to the inept closed-door schmoozefest with mayor Michael Nutter.

This is not a question of boring retail bond investors; it is simply a question of telling the truth, not making one set of statements to bond underwriters and another set of statements to retail investors.

I do not play the muni bond market at all, long or short, but it's worth repeating that what happened in Stockton, California is not likely to stay in Stockton or even the state of California.

It's time Philadelphia face the truth about what needs to be done. One-time selling of assets and closed-door meetings that give the appearance of hiding something is not even a start.

Mike "Mish" Shedlock

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