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Insiders Are Cashing In on State's Bond Market

September 27, 2004|Evan Halper | Times Staff Writer

SACRAMENTO — With California state and local governments issuing bonds at a rapid pace, a handful of political insiders are quietly profiting by helping investment banks win the underwriting contracts.

An impressive list of politicos -- Democrats and Republicans alike -- have cashed in on the little-known but lucrative business. They include former San Francisco mayors Art Agnos and Willie Brown, a business associate of state Senate leader-elect Don Perata (D-Oakland) and Anaheim Mayor Curt Pringle.

Their role is to open doors for those banks. In return, they typically get 10% to 20% of the business they help land.

The growing use of consultants -- and a rash of high-profile criminal cases involving them -- is troubling regulators in Washington, and causing critics here to ask whether state and local government bond deals are going to the most qualified and competitive investment banks -- or the best-connected.

"These consultants very often add very little value and just represent a vehicle that politicizes the process," said Arthur Levitt, chairman of the U.S. Securities and Exchange Commission from 1993 to 2001. "The name of the game is access. And campaign finance is what is driving the proliferation of advisors and gatekeepers.

"It's 'deal with us and you have a better chance of getting business.' As far as I am concerned, that is money taken out of the pockets of investors."

Banks that use consultants say it is the only way to keep track of potential business opportunities. "We don't hire them for political influence," said Dennis Ciocca, senior manager of Sutter Securities Inc. in San Francisco. "We don't have enough staff to be on top of what is going on at the state level. If they can get us a piece of business we wouldn't otherwise be aware of, then it is worth it."

The Bond Market Assn., an industry group, argues that the consultants enable more firms to compete for bond deals, ultimately benefiting taxpayers. But critics question the hiring of political insiders for that job.

"It would be one thing if they were experts in this area," said Robert Stern of the nonpartisan Center for Government Studies in Los Angeles. "But I don't think these people are bond experts."

It's a secretive business. Many consultants did not respond to repeated requests for comment. And most investment bank executives contacted refused to discuss why they hired former politicians.

Some bank officials said privately that they would like to see federal regulators ban the practice outright so the banks wouldn't feel pressure to hire people for their connections.

Federal records show that one of the top-earning California consultants is former Assembly Majority Leader Mike Roos, a Democrat who represented the Los Angeles area from 1977 to 1991.

Roos has long-standing ties to state Treasurer Phil Angelides, who picks the investment houses to bring into state bond deals. Roos gave Angelides one of his first big political jobs, as a chief of staff. He went on to help Angelides raise campaign cash.

Now, Roos runs a consulting firm in Los Angeles. His clients include San Francisco-based Stone & Youngberg, one of the leading sellers of municipal debt in California.

Over the 12 months ending in June, Roos helped the San Francisco firm land enough in state bond business awarded by Angelides' office to collect a total of $214,000 in fees.

Angelides refused to discuss his relationship with Roos or any other consultant.

"If you want to know what the investment banks are getting for their money, the best people to ask is the investment banks," said Mitchel Benson, a spokesman for the treasurer. "They are the ones who are hiring these people. They should explain why they are hiring them, who they are hiring and what they get out of it."

Benson said the treasurer has stringent policies to ensure that every bank is treated equally, regardless of whom they hire. He said the treasurer will meet with any bank representative who asks. Roos declined to be interviewed, as did Stone & Youngberg representatives.

Stone & Youngberg recently added Brown, the former San Francisco mayor and Assembly speaker, to its roster of consultants. He was signed up under the same terms as Roos: $6,250 per month plus 10% of the business he brings in.

The use of such politically connected consultants has caught the eye of federal regulators.

The Municipal Securities Rulemaking Board, which oversees banks involved in government bond deals, is considering a ban on outside consultants after a spate of scandals across the country.

Most banks that have filed comments with the board -- including Stone & Youngberg -- oppose the proposal.

Agnos, the former mayor of San Francisco and a consultant for the Los Angeles investment firm E.J. De La Rosa, said the consultant's role is not to provide access, but merely advice.

"I do no lobbying, I do not call anybody's office," said Agnos, who earned more than $220,000 off a single state bond deal in 2003. "I help the firm develop marketing proposals."

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