When Can Bond Investors Lie to Banks?

The usual way that municipal bonds get issued is that a city or state or agency or university or whatever calls up its investment bankers, and the investment bankers call up a bunch of muni investors and get them to put in orders to buy some of a new bond. Buying newly issued bonds is generally a good way to make a little extra money—muni bonds, like corporate bonds and stocks and most other things, tend to “pop” when they first start trading—so it is good for the investors to get these calls. On the other hand sometimes a new muni deal will struggle to find buyers, so it is good for the investment banks (and the municipalities) if the investors take these calls. It is a business of relationships: The banks like being able to call investors to place deals; the investors like getting the calls to buy lucrative new issues; everyone is better off if they stay friends and work well together.

Another, less usual way that municipal bonds sometimes get issued is that one investor calls up a city or state or agency or university or whatever, or its investment banker, and says “hey if you want to issue a new muni bond just sell all of it to us.” For the issuer this approach—called a “100% placement”—might be faster or more certain or more convenient than the usual approach of having banks market the deal to a lot of potential buyers, but it might also be more expensive: If you’re only selling the bonds to one buyer, you’re not getting a market check on the interest rate. For the investor buying all of the bonds, there are obvious advantages: You’re buying a lot of bonds from an issuer that you’ve checked out and like, for one thing, plus you are hopefully getting a bit of a higher interest rate than you’d get in a regular marketed transaction. For the investors not buying all the bonds, there is something obviously annoying about the existence of 100% placement deals. A lot of your advantage, as a big muni bond investor, is getting calls from banks when a new deal is launched. If you don’t get those calls because deals are 100% placed with one investor, you lose out.