Pitfalls to a Proposed Market Reform?

In 2012, I moderated a session at Brandeis International Business School’s Municipal Finance Conference.  In this session, Professor Andrew Ang of Columbia Business School presented a proposal to create

a nonprofit independent advisory firm—CommonMuni—that would reduce borrowing costs for municipalities and increase returns for investors.

CommonMuni would work to promote transparency, liquidity, and best practices in the municipal bond market.

My commentary on this proposal was published in the Fall 2013 issue of the Municipal Finance Journal.  I support the creation of CommonMuni.  I have some reservations, however.  In particular, I warn that “best practices” can be problematic.  There can be sharp controversy over what constitutes best practice.

For example, Ang and his coauthor Richard Green oppose including call options in municipal bond offerings.  They argue that embedded options make it difficult to compare different bonds and reduce liquidity in the market.  But issuers, like homeowners, value the ability to refinance their debt if interest rates drop.  Issuers have often been able to retain options at a reasonable cost.  I don’t believe that theoretical improvements in market liquidity would induce issuers to give up their options.

Do you see pitfalls in CommonMuni’s “best practice” plans?

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