By RICHARD PEREZ-PENA and RANDY KENNEDY
Two Sundays ago, about 15 of New York State's top finance experts, armed with
spreadsheets and skepticism, sat around a conference table in the State Capitol
building in Albany to grill proponents of the Metropolitan Transportation
Authority's five-year, $17 billion capital plan.
The pitch they heard was this: that the M.T.A., to help pay for a new generation
of subways, buses and trains, should undertake an unusual and highly complex
restructuring of its debts, one that would result in the largest sale of municipal
bonds in American history.
By all accounts, it was a tour de force lasting more than three hours,
accompanied by two thick volumes of supporting charts and tables that countered
every objection. By early evening, reluctant officials from the Assembly and the
Senate had been won over, and the Legislature is now expected to authorize the
refinancing, perhaps as early as this week.
But the person making the presentation was not an official of the M.T.A. He was
Robert Foran, senior managing director of Bear Stearns & Company, the investment
firm and Wall Street powerhouse. State officials say that Bear Stearns helped sell
the M.T.A. on the idea of debt restructuring, that Bear Stearns that did the
exhaustive homework to back it up and that Bear Stearns was dispatched to Albany
to quell the Legislature's fears.
And a number of former M.T.A. officials add that Bear Stearns will almost
certainly make the biggest profit. The firm is widely expected to emerge as the lead
underwriter of the bonds, which will generate commissions of about $100 million for
all the investment banks involved.
Having already gained extensive knowledge of the agency's finances, Bear Stearns
will essentially carry out a deal it helped to design, a position that gives it a
significant advantage over its competitors.
There is nothing illegal about Bear Stearns's dual role, nor is it particularly
rare. Many government finance experts say there is nothing questionable about it,
though a minority say it does raise some ethical qualms. Either way, in recent
years, the M.T.A.'s use of the firm is perhaps the most striking example of the way
in which Wall Street can shape public policy to its own benefit.
One thing is clear. The Bear Stearns proposal to restructure the debt more than
doubles the total of the new bonds to be sold. That, in turn, means that the
underwriters' fees more than double. The M.T.A. expects to pay its underwriters 0.6
percent of the value of the bonds -- $90 million for the $12 billion refinancing and
a related $3 billion bond issue; $132 million for the entire $22 billion debt
package.
"Without question," the transportation authority's chairman, E. Virgil
Conway, said in an interview, "it's a boon to the broad investment banking
community."
Bear Stearns has been in a similar position before.
In 1997, it advised the Long Island Power Authority -- an agency, like the
M.T.A., under the state's control -- on buying out most of the assets of the Long
Island Lighting Company. The firm then became the lead underwriter of what turned
out to be, at $7 billion, the largest municipal bond issue to date.
The authority's plan far surpasses that. It envisions selling $12 billion in
bonds to refinance old debt, plus $10 billion in bonds over five years for new debt.
The deal would be the largest sale of municipal bonds in United States history.
The plan could have been drawn without restructuring such a huge part of the
agency's debt, as Mr. Foran advocated that Sunday afternoon. Many finance analysts,
including those with the Legislature, say they have grave doubts about the wisdom of
the move. But most of those concede that, given the unwillingness of Gov.
George E. Pataki and Mayor Rudolph W. Giuliani to contribute more money to the
system's project needs, the refinancing is the best of a set of bad alternatives.
Critics of the financing plan say the only way for the M.T.A. to avoid such heavy
borrowing would be for the state and the city to resume the role they once played in
providing heavy subsidies to the system.
In September, the agency proposed a five-year rebuilding plan that included
preliminary work on a Second Avenue subway, a subway link to La Guardia Airport and
construction of a Long Island Rail Road connection to Grand Central Terminal.
It was common knowledge that the agency would have to rely on an enormous amount
of borrowing.
"You don't plan to issue $22 billion worth of bonds without talking to the
banks, and we certainly sought the advice of our present senior managers, Bear
Stearns, Salomon Smith Barney and PaineWebber," Mr. Conway said. Other firms,
he said, gave advice as well, including some that was unsolicited.
Firms frequently give that kind of advice free to government agencies, in hopes
of cementing the relationships and trust that can lead to lucrative underwriting
contracts when the bonds are sold.
"I might add that these firms are very free with their advice," Mr.
Conway said. "They want to put their best foot forward."
Mr. Foran and Bear Stearns did not return calls last week to discuss the firm's
role.
But finance analysts in government and on Wall Street said that Bear Stearns's
work with the transportation authority and knowledge of the deal would give it what
one called "a huge advantage" in competition for the underwriting contracts,
particularly for the prized role of senior manager, or lead underwriter.
Government finance experts generally find nothing untoward in this relationship.
"I'm not troubled by somebody coming to an issuer with a good idea, and then
getting hired as managing underwriter to do it," said Dall W. Forsythe, a
former New York State budget director who is a senior fellow at the Rockefeller
Institute, a government study center. "That's the best way to get free use of
this very high-priced talent."
But some financial analysts are troubled by the relationship, given that
throughout its dealings with Bear Stearns, the authority has not had a financial
adviser, a banking firm paid to give guidance on bond sales and to cast a cold eye
at the plans put forward by other firms.
"I think internally right now they lack capacity to know what their options
are themselves," a former M.T.A. official said. "Therefore, they seem to
be more deferential to the views of their banker, and the banker, obviously, is
worrying about his own interests here."
The official said that he considered the plan misguided, and that the
responsibility rested mostly with M.T.A. officials. "I think the M.T.A. chose
not to attempt to break out of the box that was given by the Legislature and the
Governor -- that there would be no new subsidies," he said.
One of the Legislature's top finance officers, who spoke on condition of
anonymity to avoid angering the lawmakers he works for, who favor the deal, said of
the relationship with Bear Stearns: "I think it's right on the edge, ethically.
I think the M.T.A. allowed them to blur the line between financial adviser and
someone looking to make a profit off this deal."
The need for that line is evident in securities industry rules that bar a
financial adviser from bidding to underwrite a deal it helped to create.
Mr. Conway insisted that such concerns are unfounded, in part because the M.T.A.
has sufficient in-house expertise to bring its own informed skepticism to the
process. The agency, he also noted, is shopping around now for a financial adviser,
a process it began this month, and any bond sale is six to eight months away.
The loudest criticism of Bear Stearns's role has come from people who are opposed
to the entire structure of the plan and predict it will ruin the M.T.A.'s finances.
"It makes me nervous that a private firm has structured a multibillion-dollar deal
that will impact on the future of the transit system for three decades, that they
thought it up, pitched it, did all this work to flesh it out, lobbied the State
Legislature directly, and they're the ones who stand to make tens of millions of
dollars off of it," said Gene Russianoff, staff attorney at the Straphangers
Campaign and an ardent critic of the plan. "They have an inherent
conflict of interest."
Mr. Conway dismissed such talk as "the last, desperate act of the naysayers
to torpedo the plan."
Several state officials said they understood that the idea for refinancing the
M.T.A.'s existing debt originated with Bear Stearns. When asked, Mr. Conway said he
could not recall. "That's lost in the mists of history," he said.
"It's hard to say where ideas originate."
Those same officials, and some M.T.A. officials, say it has been clear for
several months that Bear Stearns was playing a central role in advising the
authority and coming up with a plan to structure all the debt. When Mr. Foran and an
associate made the April 16 presentation to the state finance analysts, they handed out
two volumes of supporting documents -- one dated Jan. 19 -- with his firm's
logo on each page.
When asked how it was that Bear Stearns had elbowed out other firms in winning
that role, Mr. Conway disputed that characterization. "They didn't end up in
any special position," he said.
The state officials said the April 16 session came about partly in response to
questions they had directed at the M.T.A. They said that the authority had been
unable to dispel their doubts about the refinancing, and turned to Mr. Foran to do
it for them. Again, Mr. Conway disputed that view of events, saying that Mr. Foran
simply "got invited up to answer some technical questions."
Mr. Foran's presentation, according to those present, was exhaustive, devoid of slides,
wall charts or any other visual aids.
State officials said Bear Stearns and Mr. Foran had particular credibility
because of the Long Island deal, a factor that they believe also helped the firm win
the M.T.A.'s ear.
Bear Stearns began as the Long Island Power Authority's financial adviser as the
agency, in 1997, prepared a partial takeover of the Long Island Lighting Company.
The firm then quit as financial adviser in order to be able to bid on the
underwriting contracts, an unusual switch.
Some Long Island politicians grumbled that the firm's actions were ethically
questionable. Critics were already asserting that Bear Stearns's role as a major
financial supporter of Senator Alfonse M. D'Amato and the state Republican Party had
helped it secure its closeness to the Power Authority. Federal prosecutors ended an
inquiry into those allegations last year without issuing any findings.
In the end, authority officials insisted that the firm won the role of lead
underwriter because it had the best presentation -- thanks in part, some conceded,
to its superior advance knowledge of the deal.