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We Have the Responsibility to Make GICs an Honest Market

The Bond Buyer – Letter to the Editor

December 11, 2006

Nearly two years ago (Jan. 25, 2005) — The Bond Buyer published my letter to the editor: “Technology is the Ultimate Solution to GIC Bid Rigging.” In it I voiced my concerns regarding the old-fashioned, non-transparent process by which bids for GICs are received (i.e., phone or fax) and likely abuses – including undisclosed payments to GIC brokers and bogus bid certifications.

These abuses are not only crimes against federal and local governments, but also against the vast majority of industry participants, who have earned their right to a good reputation. Recent headlines regarding investigations by various federal agencies of bid rigging, payoffs, etc., cast a shadow over all municipal finance professionals involved in GIC transactions.

As a result of these investigations, some have called for additional enforcement. But more regulation is not the answer; not even self-regulation. What is the answer? For the past 10 years we have been telling issuers and GIC brokers that open electronic GIC auctions are the best way to assure transparency and integrity in the bidding process. Nonetheless, the response of some GIC brokers – who figure prominently in recent headlines – has been to argue that bidders bid more aggressively in the old-fashioned, closed-phone or fax auctions of the type that are now the subject of investigation.

One of these GIC brokers has even procured a legal opinion saying open electronic GIC auctions do not satisfy the bid-rigging safeguards built into the current rules. This is self-serving nonsense. There have been 339 successful electronic open GIC auctions since 1999 involving hundreds of issuers, financial advisors, bond counsels, and GIC providers; all doing their part to make the GIC market more efficient, competitive, transparent, and honest.

Internet technology and the open-auction format ensure that the GIC is solicited and awarded in an arm’s length-manner, with all bidders having equal opportunity to bid, and no bidder having the opportunity to get a “last look.” Also, and 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 it.

GICs are a perfectly suitable investment for bond proceeds. We all have a responsibility to ensure that the nefarious deeds of a few bad actors do not burden the whole municipal GIC market with disrepute and more regulation. The next time you are involved in a GIC solicitation, use the technological means at your disposal to make it a competitive, transparent, and honest process.

Dan Veres
Executive Vice President and Chief Operating Officer
Grant Street Group