U.S. Brokers Find Reassurances at Trade Conference : Investments: Former O.C. treasurer’s guilty pleas to charges related to the county bankruptcy seen as vindication by attendees.
The nation’s brokers and securities firms, battered by a slump in underwriting business and accusations of misdeeds over derivatives, came away from their annual conference expecting less regulation, fewer lawsuits on securities transactions and lower taxes.
The soothing message was delivered by lawmakers and congressional staff members as the Public Securities Assn., a trade group that represents securities firms, met at the Greenbrier resort, a plantation-style complex set among rolling green lawns in West Virginia, where games of tennis and rounds of golf were as central as business.
No municipal officer played a greater role at the conference than Orange County’s former Treasurer-Tax Collector Robert L. Citron--even though he was not among the attendees. Citron on Thursday pleaded guilty to six felony charges related to the county’s $1.7-billion investment loss on its wrong-way bets on interest rates.
For those attending the PSA conference, the plea was received as a vindication of their view that brokers bore little responsibility for selling Citron the securities that helped throw the county into bankruptcy--sales the county has charged were unsuitable.
“With Robert Citron, there’s no amount of suitability that would have saved him,” said Wayne Abernathy, a staff economist on the Senate Banking, Housing and Urban Affairs Committee and an adviser to Sen. Phil Gramm (R-Tex.). “Sen. Gramm believes we run the risk of imposing requirements that don’t make much sense in the real world,” he said.
Although Orange County is still suing Merrill Lynch & Co., its major broker, members of securities firms and brokers interpreted Citron’s plea as a piece of good news in the midst of the slump in business this year.
“Maybe my bonus will go up $10,” said an attendee from one securities firm.
Speakers from Washington said there was virtually no chance Congress would pass legislation designed to prevent brokers from selling unsuitable securities. Instead, some Democrats said they would rely on the regulators. Abernathy said there was a danger of having the regulators do too much.
Sen. Christopher Dodd (D-Conn.) said he’d never support new derivatives legislation, in part because he didn’t perceive the problem to be widespread.
Even so, investors in at least 17 states, stretching from Maine to Florida to Montana, have lost money on derivative securities, some of which are difficult to value, and, therefore, to sell. (Derivatives are instruments whose value is based on an asset, currency, commodity, rate, or index.)
Securities firms may still face obstacles at the state level when selling securities, however.
At a sparsely attended talk on Saturday, Martha Whitehead, the state treasurer of Texas, said that last year had taught municipal officials a lot about derivatives.
Whitehead said the Texas state Legislature is now considering a bill that would prohibit some municipal investors from buying mortgage securities, such as principal- and interest-only stripped mortgage securities and so-called inverse floaters. A few other states are considering similar measures.
To be sure, not all the news was good. Brokers still confront problems in the underwriting business stemming from a rise in interest rates since February, 1994.
Nowhere is that depression more in evidence than in the $1.4-trillion market for bonds backed by home mortgages.
High rates have ensured that fewer consumers want to take out loans, leaving Wall Street with few loans to package as bonds. That, combined with a new distaste for complex bonds among investors, has meant smaller bonuses, a decline in underwriting and layoffs.
A breathless parody of Orange County’s woes and a repast of filet mignon with julienne vegetables failed to animate the less than 60 brokers and their spouses who attended the PSA’s mortgage division dinner.
The scene couldn’t have been more different at the dinner for the PSA’s municipal bond division Friday night.
The people who attended that dinner--a crowd three or four times larger--were treated to remarks by James Lebenthal, chairman of Lebenthal & Co. and a well-known figure in the $1.2-trillion municipal market.
Lebenthal exhorted his listeners to promote investment in the municipal bond market to boost savings and the nation’s infrastructure so their children could fulfill the American dream of living better than their parents. The audience, Lebenthal said, ought to take pride in looking at public works, such as bridges, and saying: “I built that.”
His speech roused more enthusiasm among the audience than a similar speech by Sen. Dodd earlier Friday: Lebenthal received a standing ovation.
One message for investors at this year’s conference is that they are likely to bear the bulk of the responsibility for judging whether the often-complex securities Wall Street creates are suitable investments. The cost of wayward bets of municipal treasurers on market movements may be borne primarily by taxpayers.
