From the USA Today – November 19, 1997
Bonds Auctioned Over the Net
By the Associated Press
PITTSBURGH – This city shook up the cloistered world of municipal finance Tuesday with a first-ever sale of bonds over the Internet.
Pittsburgh also broke new ground by selling its $70 million issue in a live auction, which allowed bidders to top each other’s offering price.
Applause heralded the end of the half-hour of bidding at noon ET when a computer locked in winning bids. Amid frowning portraits of past mayors in a room in city hall, officials said they were satisfied with the offering.
Cities traditionally sell bonds by accepting sealed bids from brokers or negotiating interest rates with them. That method would have cost the city about 5.3% to borrow money, finance director Paul Hennigan said.
But the bonds sold on the Internet had an average interest rate of 5.17%, as competing buyers bid the rate lower.
Hennigan estimated that the city saved about $300,000 in interest and commissions. The savings will go to public projects.
“The results, we think, will create a new standard for how these deals are done and save municipalities such as the City of Pittsburgh significant amounts of money,” Mayor Tom Murphy said.
But the idea of using the Internet to auction bonds, which city officials first broached several months ago, has spread unease through brokerage houses. They worry at being placed in the awkward position of bidding against potential customers who theoretically could buy directly from the city or agency that issues the bonds.
“When Pittsburgh said it would accept bids from investors and dealers, then the dealer community said, ‘We won’t bid,’ said Curtis Roach, a principal at Belle Haven Investments, a municipal bond brokerage firm based in Greenwich, Conn.
City officials bowed to such concerns, making the sale off limits to insurance companies and other institutional customers who normally buy bonds for mutual funds or pension investments. Only brokers were allowed to bid.
Eight firms ranging in size from Roach’s specialized firm to Wall Street giant Morgan Stanley, Dean Witter, Discover & Co. placed winning bids for chunks of the $70 million issue, which was divided into bonds of varying maturity dates.
The brokers will make money as they always have, by reselling the bonds for more than they paid.
For Roach, the sale went well. He was the winning bidder for issues maturing in 2010 and 2016 and said he had customers waiting. One complaint: he didn’t like seeing his price posted on the auction Website. He said customers may feel emboldened to bargain harder, knowing what he paid.
“It may be a little too much disclosure…(but) I’m not sure it’s necessarily a bad thing. “It’s not what we’re accustomed to,” Roach said.
More change will come if Myles Harrington, president of Grant Street Advisors in Pittsburgh and the mind behind the Internet auction, has his way.
Harrington has patented the auction program, MuniAuction, and is talking to other bond issuers about using it. He agreed that the program could make brokers obsolete if customers bypass them and buy the bonds directly.
Brokers told him so, complaining that his idea will further squeeze their profits at a time they’re already struggling.
“You’d have a hard time finding someone less popular in the industry right now than me,” Harrington said.