Politics, Profit and Public Debt
Tucker, William, Insight on the News
On May 3, Merrill Lynch, the nation's largest brokerage company, suspended three of its top municipal bond specialists after a routine audit turned up "irregularities" in its dealings with Armacon Securities, an obscure New Jersey corporation.
A small Clementon, N.J., outfit that started in the securities business three years ago with less than $9,000 in assets, Armacon had rocketed to the forefront of New Jersey municipal finance. After taking part in several major offerings in 1990, Armacon was selected by Merrill Lynch in 1991 to participate in a syndicate that underwrote the record $2.9 billion refunding for the New Jersey Turnpike Authority.
How did a small firm, operating out of a shopping mall with only a skeletal staff, suddenly become such a heavy hitter in New Jersey finance? The answer became clear when it was revealed that Armacon was half-owned by Joseph Salema, the long-term aide and chief of staff to New Jersey Gov. Jim Florio. On May 25, Florio accepted Salema's offer to step down.
The disclosure has set off a wave of investigations. While federal prosecutors continued to delve into the Merrill Lynch-Armacon connection, Rep. John Dingell, a Michigan Democrat and chairman of the House Energy and Commerce Committee, has vowed to investigate the entire municipal securities industry. On June 7, the Securities and Exchange Commission mailed letters to 30 major Wall Street firms asking them to detail all political contributions of more than $100 to politicians with whom they have dealings in municipal bond issues.
"Our industry has no good guidelines on disclosure of political contributions or hidden agreements among firms," says J. Chester Johnson, chairman of Government Finance Associates, a firm that specializes in rescuing troubled municipalities. "Based on the recent disclosures, it appears there's been more backscratching among firms than anyone previously recognized."
Reports from around the country are revealing a seamy underworld in which favoritism and shady dealing over the hundreds of millions of dollars that regularly change hands in bond issues form the lifeblood of many a political career.
In Kentucky, Bill Collins, husband of former Gov. Martha Layne Collins, is scheduled to go on trial in August. He is accused of extorting money and gifts from two securities firms seeking to sell the state bonds. Among other things, the indictment charges that Collins forced one firm, Donaldson, Lufkin & Jenrette, to buy a stake in his $650,000 racehorse partnership and give him a $35,000 piano, which he presented to his wife, then the governor.
New York City Comptroller Elizabeth Holtzman made headlines recently when it was revealed that she had awarded a contract to underwrite the city's bonds to Fleet Securities Inc. only seven months after Fleet Bank, its corporate affiliate, had loaned Holtzman 350,000 at low interest on an unsecured basis in the midst of her campaign for a Democratic Senate nomination. (Holtzman finished fourth in the 1992 primary, behind New York Attorney General Robert Abrams, former vice presidential candidate Geraldine Ferraro and activist Al Sharpton.) Holtzman's actions are now under review by the city.
With the loan still unpaid in May, Holtzman began making personal telephone calls to investment bankers, asking them to help retire the debt by contributing $6,500 for each of their public-finance professionals -- the legal limit in the state. As city comptroller, Holtzman is the principal authority in selecting the underwriters to sell the city government's bond issues.
Most observers agree that while such bold behavior is not exactly the rule, the practice of allowing politicians to choose underwriting syndicates without any clear standards is ripe for abuse.
As the Bond Buyer, the daily newspaper of the industry, put it: "Market players often characterize getting a piece of a negotiated transaction strictly in terms of relationships. …