The Bond Buyer– Letter to the Editor
January 25, 2005
GIC bid rigging in the municipal market is no revelation. With huge sums of money involved and an archaic system of phone or fax bids, is it any wonder that the integrity of the bidding process is consistently undermined?
It is incumbent on issuers and bond counsels to become more closely involved in the bidding process, or these back room deals will continue to pervade the GIC market. A bidding agent who receives undisclosed payments or makes false certifications defrauds not only the federal government but also the government officials who hired them.
The IRS’ recently proposed rules establishing higher standards for tax-exempt bond opinions is a step in the right direction. The proposed rules would prevent bond counsel from blindly accepting certifications from third parties to conclude that safe harbor requirements were met in soliciting GIC bids.
But the ultimate solution to this apparently widespread problem is not stricter regulations or enforcement; it’s technology. This particular segment of the municipal market has been slow to seize the use of technology. Technology is now available that allows electronic bids to be submitted in an open auction, giving GIC providers the opportunity to see their rank relative to competing bidders and, with this knowledge, the ability to improve the rate they are willing to pay for the funds.
Internet technology and the open auction format ensures that the GIC is awarded in an arm’s length transaction, all bidders have an equal opportunity to bid, and no one receives a “last look.” Also, equally important, the process is transparent. The issuer and bond counsel witness all bidding activity as it takes place and receive a permanent record of the auction activity.
The stakes are high. Bid rigging not only endangers a bonds’ tax-exempt status, it also compromises the integrity of the municipal market. A near foolproof solution to this problem is to invite all eligible investment providers to compete in an open auction using Internet technology.
Chief Operating Officer
Grant Street Group