<html><body>American Enterprise Institute September 9, 2008 <TABLE cellSpacing=1 cellPadding=1 width="100%" border=0> <TBODY> <TR> <TD> <DIV class=BodyText>1:45 p.m. </DIV></TD> <TD> <DIV class=BodyText>Registration</DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText>2:00 </DIV></TD> <TD> <DIV class=BodyText>Panelists:</DIV></TD> <TD> <DIV class=BodyText>Richard A. Ciccarone, McDonnell Investment Management, LLC </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText>David R. Kotok, Cumberland Advisors</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText>Larry Lavender, House Financial Services Committee </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText>Joseph Mysak Jr., Bloomberg </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText>R. Christopher Whalen, Institutional Risk Analytics</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText>Moderator: </DIV></TD> <TD> <DIV class=BodyText><A class=eResources href="http://www.aei.org/scholars/scholarID.88/scholar.asp">Alex J. Pollock</A>, AEI</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText>4:00 </DIV></TD> <TD> <DIV class=BodyText>Adjournment</DIV></TD></TR></TBODY></TABLE> [Edited transcript from audio tapes] Proceedings: American Enterprise Institute The Largest Municipal Bankruptcy Ever September 9, 2008   Alex Pollock:  All right Mr. Whalen, if you d like to have a seat, we ll begin.  My co-sponsor, my fellow in-man on this--  Ladies and gentlemen, good afternoon and welcome to our conference on Jefferson County and municipal finance in the wake of the bubble.  I m Alex Pollock, a resident fellow here at AEI, and this discussion is jointly sponsored by AEI and the Professional Risk Managers International Association, which is represented on the panel by my good friend, Chris Whalen. We have a double focus today.  First, the Jefferson County financial crunch itself, which, as we all know, may turn out to be the largest municipal bankruptcy ever, although we had a discussion over lunch with the panel and the prediction is that a deal will be made in which large numbers of people take haircuts instead, but we will see.  Jefferson County represents, all by itself, a really fascinating combination of financial factors having to do with the bubble and the bust.  These include adjustable rate borrowings based on auction rate, bonds, heavy use of derivatives.  Jefferson County is reported to be the biggest user of interest rate swaps among all counties in the United States and interestingly have 5.8 billion dollars of hedges against 3.2 billion dollars of bonds.  These derivatives were meant to be hedges or were thought to be hedges, but they did not work.  The problems involved the rating agencies and the bond insurers.  The downgrading of these bond insurers put the swaps into default.  There s the interesting question of the relationship of Wall Street to relatively unsophisticated financial actors like municipalities.  This puts me in the mind of the law of one my bond market friends, which is as advice to municipal financial officials, If you don t understand it -- he says, -- after asking all the questions you can think of, say no.   There s also, in this Jefferson County, the whiff of local political scandal and, of course, just the fact that at the moment the County is broke and owes more than it can pay.  So, today we re meeting to discuss this most interesting and messy problem.  That s today.  Tomorrow, in Montgomery, Alabama, Governor Riley has arranged a meeting of the county officials and the Wall Street creditors or, we should say, yet another meeting, after four previous forbearance agreements, the most recent one is set to expire September 30th.  The County Commission President, misquoted as having said recently, They can take this or we ll see what a bankruptcy court will do.   What will happen, what should happen, I m sure our panelists will instruct us on these questions. The second focus is credit issues in the municipal sector in general, this huge and essential financial sector.  Of course, it has its revenues and financial condition closely tied to real estate, and here we are in the biggest real estate bust in decades.  Obviously, municipalities are heavily dependent on property values and real estate transactions.  There are other elements of some municipalities in trouble in various parts of the country from derivatives transactions with lawsuits cooking over these huge pension costs, problems of infrastructure, maintenance, and others.  So, we have also asked the panel to address these wider issues in municipal finance.  Let me introduce our outstanding panel in the order in which they will speak.  First, Joe Mysak, who has been a municipal bond columnist for a long time, he has been at it with Bloomberg since 1999.  From 94 to 99, he wrote and edited Grant s Municipal Bond Observer and Grant s Municipal Bond Issuer and previously is with the Bond Buyers, so he has been around these issues awhile.  Joe is the author of Handbook for Muni-Bond Issuers and co-author of the Guidebook to Municipal Bonds, and he has been a very active and engaged reporter and commenter on the Jefferson County financial problems. Dave Kotok will be next, who co-founded Cumberland Advisors in 1973.  He is the company s chairman and chief investment officer.  He also serves as a director of the Global Interdependence Center, which encourages the expansion of global dialogue and free trade.  He has published articles in the New York Times, the Wall Street Journal, and Barron s, among others, and has served as a commissioner of the Delaware River Port Authority, a board member of the New Jersey Economic Development Authority, and chairman of the New Jersey Casino Reinvestment Development Authority, so there s no doubt he had been around municipal finance. Our third speaker will be Larry Lavender, who is the Republican staff director of the Financial Services Committee of the United States House of Representatives.  Congressman Spencer Bachus, the ranking member of that committee, represents Alabama s Sixth District, which includes part of Jefferson County.  From 2001 to 2007, Larry served as chief-of-staff to Congressman Bachus.  He was engaged in private business from 1979 to 2001, but previously worked for the City of Birmingham, Alabama, which is the key part of Jefferson County, rising from intern to chief-of-staff of the mayor, so Larry is maybe uniquely positioned to describe these issues from both a local and a national perspective. Our next speaker will be Richard Ciccarone, who is managing director and chief research officer at McDonnell Investment Management in Chicago.  He is also a majority owner of Merritt Research Services, a municipal database company.  He is co-founder and past national chairman of the National Federation of Municipal Analysts, previously worked at the municipal specialist firms Van Kampen Investments and at Everen Securities as director of fixed income research.  An institutional investor magazine has designated Richard as a first-team All-American Fixed Income Analyst. Our final speaker is Chris Whalen, as I said, representing our co-sponsor, the Professional Risk Manager s International Association, and Chris is the co-founder and managing director of Institutional Risk Analytics.  He has worked as an investment banker, research analyst and journalist.  He has covered a variety of industry sectors and focuses now on financial institutions.  He contributes regularly to such publications as Barron s, the International Economy, and the American Banker, and is the regional director of the Professional Risk Manager s International Association for Washington, D.C. Each panelist will speak from 12 to 15 minutes.  After that, we will give the panel a chance to respond to each other if they wish.  We will then open the floor to your questions.  I remind both the panel and the members of the audience that this session is completely on the record; that AEI is completely open to all ideas and intellectual debate, but I do remind you, you re on the record. We will adjourn promptly at 4 o clock or whenever the questions run out, whichever is first, and I m looking forward to a great discussion.  Joe, you have the floor. Joseph Mysak, Jr.:  Thanks, Alex.  I asked one of our reporters who has been covering the story, who was in Alabama a couple of times, reporting on it.  I said, You know, you ve looked at this subject now for two years, three years maybe, and what do you think about it?  What do you make of all of this now that you can step back a bit and say, well, here s what s happened?   Hey, he thought a while, and he said, Well, Jefferson County is the poster child.   Then I said, Oh, no, you stop with the poster child, I m tired of that, one of these conference words that we re always using.   You re speaking of the conference word that I ve heard far too many times over the last, oh, I don t know, ten years, and I m sure we ll hear it today, the word disconnect.   People are in love with the word disconnect, but let me tell you, there s no disconnect in any of the stuff that s going on in Jefferson County and forcing us all to examine it today.  In fact, I would like to say, instead of poster child, we d like to call it, Jefferson County is emblematic of the problems in public finance, which includes the municipal bond market today.  It has almost everything you could want in it, that we ve seen in the municipal market, right now, sort of, collapsing.  This has real consequences for finance of -- you know, the state of municipal finance down the line, make no mistake.  But now, I m sure many of you are wondering, Why haven t I heard of this before?   Jefferson County, you know, the previous municipal disaster I ve heard about was Orange County in California and that was in 1994.  And this is one of the subjects that I ve considered now and again.  And, normally, I would say, well, it comes from the nobody cares about your market, which was how someone put it to me a few years ago, but here s a good, different phrase.  I asked one of my colleagues who does not work for Bloomberg about the current state of business journalism, and he goes, Company news is the pornography of financial journalism.   Company news being -- and he said, You know, look, company news, we all call it company news, we don t even call it equities anymore.  We d always used to call it equities.   But, company news, it s just we re obsessed with stock market coverage and the equity markets and companies, state and local finance.  I always say the public hates public finance.  They don t want to hear anything about the municipal market.  Alex brought up one of the publications I used to write for.  It s called Grant s Municipal Bond Observer.  It was a publication dedicated to what not to buy.  It carried all sorts of articles on the high-yield municipal bond market, things like that.  Needless to say, I work for Bloomberg and have for almost ten years.  So, you could see, what a tremendous success of it was. As I said before, Jefferson County has everything for the person who wants to take a look at public finance.  At the very top of it, we have the collapse of the bond insurers, which was actually started, come to think of it, as a company news story, when a noted a short-seller started assailing NBIA and Ambac, but that s another story.  But the collapse of the bond insurers -- you know, people today, we re going talk about Jefferson County having 3 billion dollars of sewer debt and 6 billion dollars of swaps.  Really, things unraveled through Jefferson County, and the debt service they had to pay started escalating when the bond insurers collapsed and, you know, were downgraded and got in trouble.  The county, much as it pains me to say, probably could have skated for years to come on its weird combination of swaps and something like 98 percent variable rate in auction debts.  But it was the collapse of the bond insurers.  We also have, figuring in the Jefferson County story, the murder of the auction rate securities market, another subject which you may have heard about earlier this year, when some people would say, well, it was the credit crisis that caused the freeze-up, the murder, as I put it, of the auction rate securities market.  Incorrect.  It was Wall Street firms deciding that they no longer wanted to participate in this market that killed the auction rate securities market.  So, that complicated things for Jefferson County.  We also have too many swaps.  This is a subject that is really dear to my heart because swaps are one of those things that have seemingly taken over the municipal market.  Now, the municipal market is overwhelmingly unsophisticated issuers.  People like high school professors and journalists and math teachers and bricklayers and owners of plumbing companies being confronted with masses of information about how to borrow money for their school district or city or county.  These are people who do not speak the language of Wall Street.  So, Wall Street concocts these various swap and derivative products and sells them to Main Street and Jefferson County.  I remember, the first time I heard of Jefferson County was actually when one of Larry Lavender s old colleagues came to my office and said, Jefferson County is going to engage in some of these swaps and derivatives.   I said, Really? and this was -- I want to say back in 1996, 1997.  So, I started writing about this because there was at least one person at Jefferson County who was very reluctant.  In fact, it s the current head of the -- president of the commission.  And, she was very, very skeptical of interest rate swaps, as well she should have been, and as all municipal officials should be.  But eventually, she was steamrolled.  And now, Jefferson County s overuse of these instruments is one of the things people have all heard about certainly.  Maybe a little bit less notorious is that Jefferson County, just a few years ago, was running conferences on how to use interest rate swaps.  And this, you know, was a lovely affair at a country club with the requisite golf course and cocktail hours, and things like that, and they were teaching the other municipalities surrounding Jefferson -- in Jefferson County how to do interest rate swaps, how to use the right swap, the right way.  And needless to say, you can no longer find this brochure on the internet.  But, swaps are one of these things that so many municipalities of this country have bought into.  They ve been -- very aggressively sold these things.  So this is why Jefferson County has 6 billion dollars worth of the things. Now, we re seeing a lot of municipalities revolt against interest rate swaps and actually even Jefferson County officials said not too long ago, You know, what, we really didn t know what we were getting into here.   Just the whole business of a county holding these conferences was the pimping of the county, if you will.  We also have the companies that rate municipal bonds falling asleep.  Two years ago, I called up an analyst at one of these companies after reading his credit report on Jefferson County.  I called up and I said, Is there some mistake here?   So what do you mean?   There is not one mention of the swaps that are being used, -- and at that point, I don t know, 22 swaps, some ridiculous amount, that the county is using.  And he said, Oh no, not at all, no mistake, that s the sewer district.   I wept.  I wanted to kill him.  How could you - what -- How is that possible?  Fine, so you also have the rating agencies falling asleep.  There is also an issue in our market, not so much an issue, it was an issue, was sort of like, oh I don t know, sort of, I don t know.  Sort of like Custer s Last Stand, you know, where there s a circle of guys at the end fighting, between how municipalities always sold bonds in the old days for most of the history of the market, which we can say, dates from around the time of 1812 when the Erie Canal was financed to the present day, and how much of the market has done today.  I m referring to what we call auction sale versus negotiated sale.  An auction sale -- municipal officials, actually have to know a lot about the market and how it works.  They used to look at this book that I remember being given a copy of in, say 1982.  It was written by a man named Lenox Moak, Municipal Bonds, their Planning, Sale, and Administration.  An almost unfathomable work, although it was put out, as I recall, by the Government Finance Offices Association, well, I think it was a different name then -- Municipal Finance officer s Association.  So they have to know, they had to read this and kind of know how their bonds, how their financing was going to work.  Now, we have negotiated financing, in which a municipality sits down and decides who is going to do all of the business first, auction sale, the municipality sets everything up and says, we re taking bids on such and such date, come and give us your bid.  In a negotiated sale, as they put it, the municipality decides who wins ahead of time, so here you have the bonds, I call this the leave the driving to us, school of public finance and so many state and local officials have just done that since about 1975-76.  It has been an erosion, but fewer and fewer municipalities, except the smallest ones really, can you imagine that, use auction sale, now it s almost all negotiated.  Leave the driving to us.  Well, Jefferson County did just that, didn t they?  And then, I d say the final element we have of this disaster is Amateur Hour on Parade which is how it is in so many state and local issuers, particularly local issuers.  As I ve said before, so much of our market is unsophisticated citizens and not too long ago, there was a big scandal in Pennsylvania, it s always in Pennsylvania, dealing with school districts buying improper investments.  Can you imagine?  And it s always school districts.  They are some of the least sophisticated borrowers in our market and there s lots of them and they have discretionary power over a pool of money and it s easy to take advantage of them.  Damn, wouldn t you know it?  In Pennsylvania right now, I guess to the commonwealth of Pennsylvania.  Just a few years ago, the state decided it will be a great idea to allow all the school districts to engage in the world of swaps and derivatives.  I can t let this go without taking a look ahead now and saying, All right, so these are the elements that are involved in Jefferson County. So what are we going to see out of all of these various elements, collapse of the insurers, okay well, at one point, the insurers covered 50 percent and more of the municipal bond market.  If we look down the line, perhaps, I don t know, ten percent of the municipal bond market will be insured.  Number 2, murder of the auction rate securities market, somehow, auction rate securities will come back.  Number 3, too many swaps, I would like to think especially now that JP Morgan Chase has dropped out of the market that municipalities who don t understand these things, which is most of them, will stop using swaps.  Number 4, rating agencies are asleep.  Well, I don t anticipate them waking up anytime soon, so if you want to invest in municipal bonds, I advise you to disregard the ratings and do your own homework.  Finally, the business about - Well, next to last -- negotiated financing, one would hope that we will see a more competitive financing and issuers who actually learn how to do everything right, cross the T s and dot the I s.  And last but not the least, Amateur Hour on Parade, well, that s not going to stop any time soon.  So, if you re all citizens you should take a good look at how -- look over the shoulders of your issuer officials and I will now turn it over to Dave Kotok. Alex Pollock:  Thanks Joe.  Dave -- David Kotok:  Chris, can you please open my slides?  Thank you.  Following Joe Mysak and being a speaker on a panel on municipal bonds, on a humid day, after lunch, for 12 minutes, is as challenging as being Elizabeth Taylor s sixth husband, but we ll try to make it as interesting as we can.  We re going to have time for cross-debates, so we can debate negotiated versus competitive sales in the Q&A session until the cows come home. Let me quickly go from the specific to the general and really talk in terms of markets, and I think I m going to be able to advance these.  There s a bond.  It still carries a triple A rating, it s a variable rate demand note and it currently has a yield, or the last time we checked it, it had a yield of nine percent, in a clearing market, a triple A muni of this type would probably be yielding somewhere between one and a half and two percent today.  And the reason it still carries that rating which preserves it under this text in the document, it s just an excerpt, is because the rating is maintained because of the standby purchase agreement of JP Morgan.  And you ve heard enough about them, so I don t want to spend time on that one.  I want to get to the list of bonds that s a few days old.  There are two variable rate demand notes.  Those are the insurers, those are the sizes of the issues, and they are resetting it at this interest rate.  These have failed.  You cannot transact in them.  There aren t any buyers, there s no backup capital facility, nobody s making a market.  This market is not clearing.  This market is dysfunctional.  A dysfunctional market means you can transact at an absurd price.  This market in non-functional, you can t transact.  We have that now, financial market turmoil in a lot of sectors and we have a lot of it in the municipal bond sector and you ll see why in a minute, and the third piece, these two issues, which are fixed rate issues, are also dysfunctionally priced.  You can trade them, they are relatively thin, and you can see in the pricing references that they re not in touch with the market.  Now, how that will play out remains to be seen.  That s a story.  That s Jefferson County s bond issues as of a week or two ago.  Let me go the other way.  Okay, how about the market that they re in, the whole market that they re in is dysfunctional and pieces of it are non-functional.  Red is the time -- this is a chart, by the way, which shows the 30-year treasury bond and it takes a bond by our municipal index and the source is Bloomberg and what it does is demonstrates the tax arbitrage of the tax exempt municipal bond.  Normal is over here.  The interest rate on a taxable security is usually higher than the interest rate on the tax-free security.  Now, you might say, well maybe there s logic in this form and possibilities would be repeal of all income taxation in the United States.  So, there are ways that you could justify this pricing mechanism.  But as a practical manner, they re not very reasonable.  That s what muni market against a taxable market looks like.  This is what it looks like today.  This was the spike and at its worst case, in this particular week, the Port of New York had a failure of 100 million dollar auction rate security for one week and the interest rate spiked to its cap and the cap was 20 percent, the Port of New York and New Jersey, know the folks who run the Lincoln Tunnel?  A couple of airports paid 20 percent to borrow money for one week.  They had the financial capacity.  There was not an insolvency question there.  There was no question about swaps.  This was a function, as Joe said.  The capital markets firms withdrew their balance sheets, stopped to make markets, and auction failed, the interest rates spiked.  The next week, the port paid off the three issues, they paid off the one that I m referring to which is 100 million dollars.  They had the money.  There s a difference between liquidity and functionality and solvency.  They are two different things.  In this case, Port of New York paid it off.  In Jefferson County s case it s a whole different circumstance, although we can drill into the arcane reserves and maybe find some cash there, too, that the judge may find if this ever gets in bankruptcy.  In any event, the key point is this.  Jefferson County occurs at a time when the whole municipal bond market is upside down.  Were it not up side down, were this to occur in more normal times, the cures for something like Jefferson County could come much more quickly.  In this market, which is dysfunctional or nonfunctional, all areas of turmoil in the 2.6 trillion dollar market municipal bonds get blown out of proportion, and then when they have some real facts behind them, they become stories like this. Okay, how badly priced is this market?  Well, you can see green is where we are, red is where we re supposed to be.  That s a Ned Davis chart which you all have in your handout.  It calculates the tax arbitrage.  What you can now see is that it is worthwhile in the United States for somebody in a 15 percent income tax bracket to own tax exempt municipal bonds instead of taxable bonds.  That s how cheap they are.  It s not supposed to be that way, folks. Let me fast-forward to why we re in this area and make a comparison.  So, I m going to go to a chart that really doesn t have anything to do with municipal bonds.  That chart is the change in the Federal Reserve s balance sheet in the last year.  That was way back here, normal.  At the same time, the muni market chart was red.  This is all the things that the Fed has done in the last year to alter monetary policy and how the role of the Central Bank is implemented in the United States and its influence is worldwide, because there s 62 billion up there that is a term-auction facility for the European Central Bank and the Swiss National Bank, and those member banks.  So, this is not just in the U.S.  That s the changes in the Federal Reserve s balance sheet.  So, if you look at the financial turmoil of the last year and back away from the specifics of Jefferson County, what do you see?  You see the following.  After Bear Stearns, we set a new rule in the United States and it is the closer you are to the Federal Reserve, the safer you are and the longer you can be sustained.  I would submit to you, there s a very good chance that Lehman wouldn t exist today, were it not for the changes in the policy that affects primary dealers.  The farther you are from the Federal Reserve, the harder it is to get any help.  And if it s a liquidity problem, not a solvency problem, the Fed is the source of fixing liquidity problems, to the extent we can fix them.  So, the greater the distance, the more steps removed, the worse it is.  This chart shows you one thing, shows you all the tools being applied by the Fed.  One thing is missing here.  There s no way to get the municipal bond market, which is fragmented amongst 50 or 60,000 issuers.  There s no way, under the present structure, to get the municipal bond market to get to the source of liquidity.  In many circumstances, the issues can t even be used by collateral, and if the banks wanted to use them as collateral, they ve got a tax law that limits them to bank qualified paper which is 10 million and smaller.  So, you ll have a fragmented market with 50 or 60,000 issues, in a dealer pricing market, with an unsophisticated buyer who spent 30 years saying, As long as it s triple A insured don t tell me anymore about it, give me the coupon and the call date and I ll decide yes or no, and suddenly the homogeneity is no longer, this market doesn t clear, it s dysfunctionally priced, the bond buyers who are the natural buyers, the 20 or 30 million Americans who are in tax bracket high enough to warrant them do not, they are bewildered, they don t understand the credits, that s a good thing.  My colleague John [indiscernible], who helped put these charts together with me and I would be out of business, were people to understand this market -- and this bewildering array is now on the table and it is affecting the finance of every school board, country, sewage authority, and airport in the United States.  So, my conclusion is, in 3 minutes, is if you look at the size and composition of the municipal market, in total, it is larger in issue size than Fanny May and Freddie Mack.  It s 2.6 trillion of direct debt and it has lots of implications that go beyond just the bonds.  But because it s fragmented, it s removed by tax law, and the normal players who could be intermediaries are all wounded or out of business.  It is curing on its own.  A word about curing on its own and I may have sympathy here with John.  You may be simpatico with me on this.  This market will cure on its own and without Federal intervention.  It s already starting to do so.  One quick example, then I m going to run out of time.  The Congress of the United States, in their infinite wisdom, no disrespect to my colleague on my right, took the housing bond and subjected it to the alternative minimum tax, which meant that the state housing authority then had to go get capped to issue housing bonds and since the AMT narrowly goes to a few million Americans, it affects more, introduces even more risks to those who don t know if they pay it or not because in any given year, it s very complex.  And the rest of them, who are above the AMT, those are the few who have million dollar plus incomes, have a lot of other options, and the ones who are below the AMT levels don t think in terms of tax exempt bonds.  What did we do when we subjected housing authorities of the 50 states to the alternative minimum tax?  We took the closest organization to the housing issue that knew local prices and terms and put them out of business.  We raised their interest rates.  We made it harder for them to obtain financing because the traditional municipal bond approach in housing finance was removed.  Only in the last couple of months, through an act of Congress, AMT is lifted from housing authority bonds.  What do we see happening in the United States now?  The housing authority is rapidly issuing tax-free bonds -- By the way folks, many of them are very good buys.  And they re injecting those funds to fix part of the housing problem in the lower and middle end of markets, which they are close to, they understand the markets, they understand the pricing, and now they can obtain funds.  So, there s an example of no Federal help in a market which is beginning to cure, and the problem with the cure, the problem that restrained the application of the cure, until a couple of months ago, was introduced by the Federal Government which prevented the housing authority from issuing a traditional municipal bond.  If you take a part of the municipal bond sector, and you say, Banks don t own bonds, because they are limited to bank qualifieds.  Insurance companies have limitations on bonds because of accounting issues.  You begin to dissect this fragmented sector, you say part of this problem, is the help, over the years, that has come from the Federal Government through the tax code.  So, an example that may be right in front of us that does not get enough attention is that there is a 2.6 trillion dollar sector and it is able to find and cure itself without federal intervention.  Now, whether that will apply to Jefferson County is another question, but will it apply to the aggregate 2.6 trillion, I think yes.  And Americans are smart enough to figure out that there s a tax arbitrage and when you can get six percent or five and a half percent without taxation by your state or federal government on a credit, you begin to understand, you realize that s a fairly appealing investment.  So, our view is all the fancy federal work we see and all the tools being applied by the Federal Reserve are not reaching the muni market, and the institutional structure which has taken decades to develop and impair the municipal market is gradually being unwound.  And so, well the outlook for Jefferson County is to sort out a mess and it ll get sorted out.  The outlook for municipal finances is to go from this worst case, multi-colored chart of disaster, and eventually cure.  So, we re bullish on municipal bonds and we think that there is finally a living example of something that can get fixed in the United States and not have the Federal Government do it. Alex Pollock:  Thank you, Dave.  Larry -- Larry Lavender:  Would you start mine, please.  First, I want to say I do work for the House Financial Services Committee, but I m here today representing myself and myself alone.  The views I m going to express are only mine.  They are not those of anybody who works for the Financial Services Committee, any member or anyone else associated with it except me.  And my views are formed by having been born in Jefferson County, I grew up there.  As Alex said, I worked for the City of Birmingham for ten years when I was young and foolish and in that capacity was part of bond issues.  And later on when I worked for a small regional investment banking firm, I was part of helping municipalities do bond issues, so I ve seen it from both sides. I want to talk about this in three different segments.  The first is I want to tell you a little about Jefferson County, then I want to tell you what I think of some of the problems in municipal finance, in general, and then some specifics about Jefferson County. First off, Jefferson County is about 660,000 people.  It s located in the center of Alabama.  It is a fairly industrial town compared to most of the rest of the state, and it s relatively prosperous but it does have some pockets of poverty.  The City of Birmingham is located in the center of Jefferson County and it probably has the greatest proportion of those low-income areas.  The bonds that were issued are Jefferson County bonds, but they are issued with the security only of the revenues of environmental services division, which is what Joe referred to as a sewer district. The principal reason for the huge borrowing by Jefferson County is that sewers are one of those infrastructure items that are out of sight and out of mind.  They are literally buried under the ground.  And as they start to deteriorate, the problems don t show up as potholes do when you re driving to work every day, they re hidden.  And the results, in Jefferson County, of decades of deferred maintenance were collapsing sewer lines which allowed infiltration and inflow of water during heavy rains, which flowed through the sewer lines to the sewer treatment plants, overwhelmed the capacity of those sewer treatment plants to cope with the volume and resulted in bypasses of raw sewage into the rivers and streams of Jefferson County.  Lawsuits were brought by environmentalists and the U.S. Justice Department to require compliance with the Clean Water Act, and in December of 1996, the County signed a Consent Decree in which they agreed to eliminate all discharges, 100 percent of the discharges of raw sewage, within ten years.  So, what you have is probably 60 to 70 years worth of deferred maintenance that had to be paid for and installed within a ten-year period.  The result was massive borrowings that overwhelmed the capacity of the county to manage them.  I called it subprime on steroids.  I watched the subprime borrowing debacle arise and develop more or less concurrently with what we ve known in Jefferson County, and I saw many of the same human frailties and systemic problems in each, they were very similar in many respects.  In particular, what you have is overborrowing by people at teaser rates in effect, lower rates than can be sustained.  In Jefferson County s situation, what you had were -- when it became necessary to increase the volume of money necessary because the cost of the process of these repairs turned out to be much, much larger than they thought it was going to be when they accepted the consent decree, they looked at what can we do.  Wall Street bankers came in and they said well, we can fix you up with these devices that will let you have a synthetic fixed rate.  It s going to be a floating rate, but we re going to put these hedges in and that will keep you from ever having to pay the higher rate.  They converted 94 percent of this debt to variable rate securities.  That s just very much like homeowners who took on variable rate mortgages with two years and then they were going to go up and did the borrowers think about how they were going to increase that in a homeowner situation, no, and neither did the county, they thought they were protected by these hedges.  More seriously, for the county, they did this with a debt service coverage ratio of 1:1.  In other words, at the time they did these things, when the rates were at the lowest they re ever going to be, the money that was available in the fund to pay debt service was exactly equal to the amount of money necessary to pay that debt service.  There was no money to pay it if the interest rates changed and rates went up.  Well, interest rates did change, the rates they were paying went up and they had to increase the amounts that were charged for sewer rates in order to overcome that.  So, in 1997, sewer rates were a dollar and 50 cents per 100 cubic feet.  Currently, they are 7 dollars and 40 cents per 100 cubic feet.  That s almost a 500 percent increase, and to put it into terms that are more understandable, I received a bill from a homeowner who was saying, What are we going to do about this?   The monthly sewer charge, not the water charge, but the sewer charge alone was 96 dollars.  That s what people are facing and it s, you know, a dramatic increase because all of that deferred maintenance that hadn t been done also meant that the rate increases necessary to pay for that deferred maintenance hadn t been done either and so instead of having collected the money over the 50 or 60 years when the higher rates should have been in place, they are trying to finance this out of rate increases within a very compressed time period.  That is one of the most serious problems in Jefferson County.  The other problem they are -- as in subprime was that, as has been previously mentioned, the rating agencies simply did not reflect reality in the fundamentals underlying the securities that were issued.  All the way up until December of 2007, nine months ago, Moody s and S&P, at that time, in December of 2007, affirmed the A3 and A ratings for Jefferson County sewer debt, which are both investment grade, pretty good investment grade ratings.  Eighty-eight days later, they changed those to D for default.  In 88 days, what happened to the underlying fundamentals?  Well, nothing.  They are going to claim as [Indiscernible] that the option rates were involved and so forth.  But the plain fact is if you look at somebody who has borrowed at variable rates that can change and they don t have any money except to pay for the rates at the low point, how can you possibly think that they can t run into trouble?  Well, they re then going to say they had credit enhancement, they had credit insurance, but if you look at those credit insurance companies, they have capital, not like a bank does, they have capital equal to about 1 percent of their outstanding policies.  There s no way that they could respond to pay if municipalities begin to default in serious numbers.  They simply are -- that is a serious failure of the credit rating agency.  What I say is there simply was no understanding of the fundamental economics underneath these bonds and that is one of the critical factors that led to this. Then I want to talk now about specifics in Jefferson County that are different from what goes on in the rest of the municipal finance area.  Jefferson County had a systemic political failure.  There were certainly some individuals who didn t do a good job.  There are people, who, as Joe said, were not very sophisticated about these things, but the truth is I think that in terms of understanding derivative finance, there are five people who understand that, they are all locked in a basement on Wall Street and they don t ever let them out.  So, I don t think there s anybody who understands it really on the streets.  But in Jefferson County, the failure was not of individuals or was not only of individuals, but it was of the system.  Jefferson County, for years had a three-member county commission, all elected at-large.  As the result of the Voting Rights Act, the Federal Government through the Justice Department intervened and required and creation of single-member districts which better reflected the ethnic composition of the county.  And so, currently we have five commissioners, all elected from single-member districts, so there s no countywide leader who has the interest of the whole government in mind.  There s nobody who can raise a consensus, nobody who can develop a mandate, and furthermore, each one of those commissioners has a narrow jurisdictional department to operate in.  One runs the sewers, one runs the finances, one runs the public safety and so they not only don t have a geographic care about the county, they don t -- if I m in the sewers, I m going to do what I want, but you don t bother me and I won t bother you.  And so you end up without anybody to provide the real leadership that s necessary to deal with a serious problem such as Jefferson County had.  Another problem is definitely incompetence.  When the Consent Decree was accepted, the estimates by the county were that it would cost 250 million dollars to do the repairs.  Some people said maybe it would be 1.2, but 250 million to 1.2 billion.  It then went up and went up and went up, and it finally ended up being 3.2 billion total borrowing spent.  The county couldn t even balance its books.  In 2006, they could not put out their interim financial statements.  They hired an outside accountant. The books that the outside accountant prepared also didn t balance.  So, they had a new financial management system by SAP, first time they turned it on, it failed.  It has been a total debacle in trying to manage this.  And that is -- I m not really overly critical of these people.  In 1997, when they started this, they had a 32 million dollar capital budget.  Dropping 3.2 billion dollars on top of that system was simply not likely to produce any result, except what did result, they simply did not have the management system, the control systems, and the project management capability of dealing with that kind of money and that kind of work.  I like to say that it s hard to steal as much as you can waste.  In Jefferson County, the primary exhibit of that was something called the super-sewer which was a plan to build a massive tunnel under the Cahaba River, the very river that the environmentalists sued to protect, to take sewage from one side of the county to the other.  Predictably, that was resisted.  County bought a huge tunneling machine that got halfway under and finally in the face of court cases and resistance, they abandoned that, buried the multi-million dollar tunneling machine, filled in the tunnel and had a total of 61 million dollars down a rat hole.  But we did have corruption.  Thus far, we ve had 21 people convicted.  Two county commissioners, the head of the environmental services division, the deputy head of the environmental services division, contractors, others, the list goes on.  One of the -- the county commissioner who was the president of the county commission at the time of most of these restructuring was Larry Langford.  He has been the subject of a civil case brought by the SEC, claiming that he took 156,000 dollars in payments from the county s bond consultants, that case is not finished.  And none of the other criminal cases are finished yet either because the grand jury is still taking testimony.  We also had passive regulators.  In 1995, a new county commissioner was elected and her name was Betty Collins.  She questioned, as Joe Mysak said, If you don t understand it, you re supposed to just say, no.   She just said, No.   There was a county commission meeting where she refused to give unanimous consent to approve a bond issue and it turned out that the director of finance was in Saint Petersburg, Florida selling the bonds when she refused to give that unanimous consent unless she can get her questions answered.  He flew back to Birmingham, at least answered some of the questions, she gave consent for the thing to be done, but voted against it, and Steve Sayler, the county finance director, leaked to the press that because of the half-a-day delay that had occurred, the bonds -- it cost 900,000 dollars.  She was pilloried in the local newspaper as a cartoon by the Birmingham News cartoonist, she was ridiculed and I think that s viewed lot differently now than it was then.  I think Joe s rule is exactly the right one and she typified that, although even Ms. Collins got pushed in to approving some of the bond issues later on because they did look so good.  I mean, for a while these deals were -- as it was mentioned here by someone I was talking to earlier said,  when they did some of these deals, they were making a great deal of money by collapsing some of the earlier deals, and it looked really good.  They weren t having to raise the sewer rates as fast and it seemed like a really good idea.  Miss Collins wrote to the chairman of the SEC-- Alex Pollock:  One minute, Larry. Larry Lavender:  -- and it was a letter with documentation, overall it was about an inch thick.  She never heard from Mr. Levitt.  So, I think that, as I said, subprime on steroids pretty well covers it.  This is my close -- that s Mayor Langford.  He was a channel 6 newsman when I worked in the mayor s office.  He went on to become a city councilman, then he went to Fairfield, Alabama, where he conceived and oversaw what was previously the largest municipal finance default in Alabama s history, 100 million dollar default of something called Visionland that he built out there.  He then went to Jefferson County.  He left Jefferson County one step ahead of this debacle and went to become the mayor of the city of Birmingham.  He is pulling a box that says Top Secret.  That s his financing plan for the city of Birmingham and he was ridiculed about this, but I really contend that if the taxpayers knew what was in that box, he needed those armed guards. Alex Pollock:  Thank you, Larry.  Richard -- Richard Ciccarone:  Let me begin by casting the blame aside for a moment, and there s plenty of that that goes around, and let s just take a look at the broader implications of what s going on here in Jefferson County.  I want to reference Jefferson County, but I think that it s important and some of the previous speakers have already mentioned this, what s happening in the broader marketplace?  I think if you take a look back and say, is this an anomaly or is this something that is systemic risk?  I hate to say this because it is a little bit of both.  You know, because an anomaly, if you look at what s going on here, this is an issue of extreme debt leverage.  It s also an issue of extreme derivatives issue which is all coming to bear right now on the early side of a wave of conditions that are going to hurt municipals in general.  In that last comment, they are going to hurt municipals in a wave in general; I have to say there s some systemic elements that are going on here as well.  Where do I come from on that?  I think basically it s the situation that allowed people to make decisions like this - this is the part that I m most concerned about.  That is that the market has this momentum, based upon what is today, will continue on in the foreseeable futures as long as they can think, or at least, as long as the bonds will be outstanding.  It gets people into trouble.  And that has been the case since time immemorial where we talk about complacency; it goes back all the way to the days of Noah.  Now, during the good times, things seem to work out okay, as was mentioned, this program even looked pretty good in the beginning, but when the confluence of circumstances and conditions go in an unfavorable direction that were not expected, it s a like a trap.  And the weakest of those will go first.  And perhaps fall the hardest.  And I said maybe it s an anomaly.  It did have extreme situations. The Muni market can go back over the last four decades and say every ten years has been a major Muni problem.  And each time it gets looked at, there are hearings and there are -- the industry circles around them, some actions are taken, some changes take place.  If you go back to 1974-75, that was the New York City default.  If you go back to the 80s, in 1983, June 15th, that was when largest previous bankruptcy occurred, that was WHOOPS default or bankruptcy.  Default I should say, they didn t go bankrupt.  And in the 1990s, it was Orange County, which also had a share of derivatives which people did not know or understand and a politically fragmented governmental system.  And now, we re at the next ten years, we re in the new decade, it was time for a new one.  It looks like Jefferson County is the one of choice at the moment.  But it all goes back to -- those are unique situations, but these conditions that allow us to get into trouble where not only names like Jefferson County in trouble, but others that are vulnerable, it s due to these overoptimistic expectations.  And there was a lot of debt in the cases I ve mentioned or there are a lot of derivatives, people felt that all of those things will continue to work just at the time in which they were issued, and therefore, we can get by with that.  It doesn t happen.  If you go and elect to study history, and I do, I have done a lot of work in looking back at the depression studies again, when it comes to municipal bonds.  And I normally don t put up a quote, because I think they re kind of boring to look at the screen, but this one I think is worthwhile.  And if you have the handout, you might read it again a little bit later.  And I think, to look at the implications here -- This was written in 1964, in a dissertation by George Hempel, who actually is known with the seminal study on the default, depression rates.  And he did this in 64, in a Ph.D. dissertation.  But what he wrote here is that Problems develop when the expectations of the borrower, the lender prove to have been too optimistic.  The danger of overoptimistic expectations is probably the greatest during periods of sustained economic prosperity.  Such optimistic expectations may lead many individual borrowing units into accepting future commitments, dangerously large in relation to the resources.   Clearly, that can be described in the case of Jefferson County, but it can go into -- when use that same definition.  And this is what he described as how we got caught by surprise in the depression, and I m going to go into that a little bit, is the same thing you could say, use the same quote and apply it to the subprime debacle, to the housing crisis, and almost every other situation that you can think of.  It s common sense to a large degree, but you know what, we keep forgetting about that common sense.  If we take a look at -- let me just say a few things about Jefferson County.  There were a lot of things that shocked investors about this, believe it or not, most didn t expect this.  Things were moving smoothly along.  People were expecting conditions to remain in a range that was mostly about what they have been receiving.  They had received triple A s by the bond insurance companies and there goes another standard of protection that might otherwise have been there, because what has happened in the industry, especially over the last 20 years, as insurance got to be a bigger, bigger, and bigger part of the marketplace, is a lot of the traditional investors and analysts that would be the screen, would screen deals, weren t looking.  They would say it s insured.  They treated them like a commodity.  In fact, Salomon Brothers in the early days got out of the municipal bond business because they had recognized that it was a commodity business, you couldn t make money in it; all the credits were treated the same because they were all insured.  So that screening device went out the window.  They got the triple A which is -- that s one of the conditions of complacency which made them reliant on someone else for their future condition.  So when the bond insurance failed, that is also when they got their first downgrade in March of 2008, I think it was February, they got downgraded on the underlying credit quality at that time, because the first line of support which was the insurance companies had now -- was under attack because of the subprime issues and they had too many risky loans.  The security type is also something that let the guard down.  Sewer revenue bonds are considered essential purpose; everybody has to pay for the water and sewer.  You want your toilet to flush was the old, not very funny, joke that was in the industry, but it was true.  They basically counted on water and sewer to be there when you needed it and would pay.  So, it also didn t get much attention.  The market over-relied on rating agencies.  Don t forget, there is tens of thousands of municipal issuers out there, and so how do you screen them.  If you re not using insurance, how many analysts do you have?  Stocks have one analyst per 35 credits or 40 credits or whatever.  We re talking about tens of thousands of municipal credits.  How does this get by?  It s not because it s getting the kind of screening and scrutiny that it could.  But because we have the complacency of great prosperity in the country, and that municipal bonds were all always safe, a lot of things don t get watched as well as they should.  Variable rate levels, which were a key component of this deal, were low and the market believed that would stay low and partly because there s not a natural short-term piece of paper like there is in the corporate industry, for commercial paper.  The times were better.  The municipal governments and state governments were issuing a lot of working capital notes that would normally go in the short-term markets to provide for some of your taxes in Muni market funds.  They needed this kind of paper.  So this paper had an appetite.  There were people out there who wanted short-term paper.  So all of these factors ruled the day and the quant models, of course, said everything should be okay.  When it came to the derivatives, they have been tested and all the best minds of Wall Street said these were okay and most of the rest of the analysts didn t understand them and said, Well, I might not be smart enough to understand them, let s them go.   So that unfortunately is part of what happened while the guard was let down.  Is this the first of many more to come?  I think that is what we re really trying to figure out here?  You d never know if you ask the rating agencies right now.  I m going to show a slide in a minute.  You wouldn t know that if you asked Congress likely.  Because Congress has been saying that the whole system wouldn t happen if we didn t have bond insurance, I m exaggerating the point, excuse me, sensationalizing that point.  Let me put it in less sensational terms.  They felt that these credits are better than the bond insurance themselves and therefore, from that reason if we really gave them the kind of risk analysis, they would all be higher rated and we wouldn t need bond insurance anyway.  Well, the problem, of course, with that is that if we start to say, Well we will use these models that were created, which I m very skeptical about models, I ll have to say.  The models that were bandied around on Wall Street, as well as in Washington, were the models that only go back by a couple of the rating agencies to the 1980s which is a period of pretty good prosperity in the country.  GDP growth was pretty good.  And in fact, a lot of the enhancers, including the insurance companies were helping credits to be bailed out, quietly, behind the scenes because they had their insurance on the line and therefore you never knew they had problems.  There were things like that that were going on that created a very low default rate, prosperity and the financial strength of the insurers and banks that were involved in the business.  These models were used when the argument was made, let s raise all the Muni ratings.   They were used in the study to say that the risk wasn t there.  So as a result, there was this movement made, ongoing, it was through rating agencies in response to the pressures that they were getting from the treasuries of California and many state and local government officers, as well as Congress, is that we should review it so that we re on a global equivalent rating scale, that s a single default rating scale, we re not more risky than corporations.  Therefore, we should go up to be triple A kind of credits.  Meanwhile, what happened is they have already been moving in that direction, particularly S&P and Fitch, over the last five years, since their first default study came out.  And with the competition in the business among the three of them, that was effective, perhaps, to get you to choose one rating agency or another when you got your rating because they use different models and methodology to get the ratings. Here s the chart that I wanted to show you.  This takes a look at just 2008, this has been going on for the last several years among some of the rating agencies but now Moody s is getting in on the act.  Rating agencies have been upgrading them left and right.  And if you can look at this here, this is the ratio of upgrades to downgrades for 2008 through August 15th and you see on this chart here, 4-1/2:1 on the number of overall credits in the Muni market and that includes riskier credits than GOs and modern sewers, 4-1/2:1 ratio, 6.6:1 ratio.  If you look at the par value or the dollar amount, not the number, if you go to GOs which they consider to be least risky, it s been a 13:.2.  Let me tell you, these ratios rarely go above 2:1 in a good year.  We re at 13:1 ratio.  11:1 in dollar amount for GOs.  Apparently, Jefferson County didn t scare anybody in the revenue bond area for utilities because if you look at this chart here, on this particular point, 30:1 and 58:1 if you look at it on a dollar basis of upgrades, downgrades, and that s just for 2008.  So they re moving towards this situation.  Now this is what scares me, and it takes you back to this whole history of default study.  We have been there, we have done that where we moved everything up to triple A and double A for GOs and sewer but particularly GOs more than sewer, very few revenue bonds in the depression.  It was just before the depression in 1929, the early bond raters thought exactly the same way.  We had a low-risk marketplace.  They are all like sub-sovereigns and therefore taxing power et cetera all are going to be great, let s move them all up.  And prior to the 1929, you had almost everything triple A in over-30,000 population for cities and double A was most of the rest, but they changed their minds and they adopted the new rating system during the depression because defaults were so high.  According to the Hempel study, there were over 30 to 200 GO defaults during that period and that s huge.  If you look at another chart, I ll just pass by quickly, a few charts from this, and I like looking back at history because if we forget history you know we are doomed to repeat it.  This is certainly the case here.  During the depression GO states which are considered to be sub-sovereign, there was one default in Arkansas that came in, in 1933, counties 359 and by 34, that was the peak year of the defaults, outstanding, cities and towns 851, school districts 882, and special districts, which are the riskiest at that time, there was 1100 of those, that didn t peak till 38.  It s also interesting to note that when the crisis started in 1929, you didn t hit the peak until 4, 5, 6 years later.  So, if we ve got a crisis that is going to last a year, that does not mean if we get by 2008 and don t have any other defaults that we re done with it.  The crisis we re facing in the municipal bonds is large and could be systemic. But if you look at another chart here, just quickly, of the percentage of credits and defaults of different categories, you can see almost 20 percent of the par value, all cities were in default during the time.  Now, granted, on the positive side, they have an excellent record, even during depression, of getting recovery, under a court mandate, sooner or later, or eventually moneys come in as the situation improves.  Of the 16 percent that defaulted during the depression, less than one percent never repaid.  But the numbers are big in all the sectors and I think this chart is even more interesting.  It leads to the following chart.  Nearly 90 percent of the 310 cities in 1929 that had over 30,000 in population were rated triple A, in 1929, over 90 percent.  Over 98 percent were rated double A or better.  We re going to the same relationship.  Fitch is already saying they expect 85 percent will either be double A or triple A when they get done on their new global rating scale.  Moody s is coming out and saying at least one or two notches higher.  Some treasurers are still protesting and saying, You re still not taking me to triple A, this a wrong system.   And this is a concern. Now if you talk about all those credits Alex Pollock:  One minute. Richard Ciccarone:  One minute.  Almost done.  If you look at this chart here, the important thing is that nearly 80 percent of the total dollar value, in that right chart there, were rated triple A in 1929 and then went into default.  We re not out of the woods.  I heard a very good point made by Larry here, that infrastructure is one of those things that are being deferred, a major problem.  It s been a problem since I ve been in business in 1979, it hasn t gone away, the bridge failing didn t influence the market this year; volume is not there on bridges.  But if you can see, in our database that we have from Merit Database [phonetic], which is a database I m familiar with, the average age is going up, steadily and has been, people are really not dealing with, this is a median for cities. And the other thing, in terms of long-term liabilities, which we have out there that s a tremendous risk is pensions and then the other post-employment benefit obligations, all these liabilities are building.  In the case of pensions, you could see the contributions have gone three times more than it was just five years ago.  These numbers are headed upward.  With the stock market in the doldrums and the tenure average way down, these numbers are going to jump.  Give it two years and you ll see them jump.  The systemic risk is that we ve got liabilities out here that we didn t have before, that we didn t even have in the Depression.  Not only for salary contracts that didn t exist, for dead amounts that are outstanding, for amounts deferred, for liabilities in pensions and OPEB, these conditions are not great for municipal bonds, yet we want to raise all the ratings, we want to let down all the guards in which I talked about earlier, of the analysts and the investors, because analysts will become, back to that word again, complacent, if things get better.  But right now, we may be at a point where we can t afford to be complacent because then immediately, we have real-estate values that are 25 percent down in many places of the country.  That s an immediate very, very scary number that hasn t been that bad since the Depression and that s the primary security for most general obligation credits.  I could go on more and work on that negative story a little bit more but I think that my time is up, so we can talk about it a little bit more later. Alex J. Pollock:  Thank you very much, Richard.  Chris? R. Christopher Whalen:  Thank you, Alex.  Today, I m speaking about an area of risk management namely in the public finance sector that s outside my usual area of focus on financial institutions and private markets.  For those of you who frequent AEI a lot, we re going to be having another segment of the subprime global debacle in October, and at that time, I m going to go through the banking industry in some detail so I will leave that for then.  The reason we decided to put this program today was that I have been getting an enormous number of reports about fraud and other abuses of structured assets, complex structured assets, that we ve been hearing about today, and of course, these conversations that Alex and I have very frequently led us to put together today s program.  I want to thank Alex and AEI, again, for participating with the 55,000 members of PRMIA around the world.  We are the fastest growing risk management association in the world and we re very focused on education, that s really our primary activity.  We also like to put on events.  But we re member-run and member-driven and that s one of the reasons I am so pleased to be putting time and resources into PRMIA. Now, we ve all heard the horror stories about complex structured assets; we ve been talking primarily from an issuer perspective today.  But I wanted to talk a little bit about investment managers who work for public agencies because they have many of the same characteristics we ve been hearing about today.  And unfortunately, I think we re going to be hearing a lot more about them.  Now, of course, we all heard a couple of years ago in the State of Florida, when the wheel started coming off the derivative markets.  They had a situation where municipalities had all pooled their money market funds into a special investment vehicle, and this vehicle in turn had invested a lot of money in CDOs.  And when these things started dropping in value and the rating started falling, the municipalities couldn t get access to their money.  The Economist commented at that time, The fiasco invites comparisons with Orange County, which was responsible for America s largest municipal bankruptcy in 1994.  In both cases, state-employed neophytes were seduced by complex products peddled by Wall Street, which is again likely to be hit with lawsuits as a result and failed to appreciate the enhanced risks that come with enhanced returns.  Unlike Orange County however, Florida is no isolated case.   At the end of 2007, as The Economist noted, municipalities from Norway to Australia had suffered losses with the SIV-type vehicles, but this was really only the start.  In 2008, I think many of you will recall, Merrill Lynch had to agree to reimburse the City of Springfield, Mass. for nearly $14 million, on the losses on risky investments.  The attorney-general of the state was involved, obviously, and essentially, they made the dealers take back the bonds.  This was mentioned by one of the other speakers.  This is a very important aspect of derivative finance.  It s one of the reasons I constantly use allusions about gaming instruments.  When the client goes bad, the tout has to take back the wager, and that s what happens with these big banks.  That s why Bear Stearns was taken over by J.P. Morgan.  J.P. Morgan was the clearing bank.  If Bear had gone into bankruptcy, Morgan would have had to make good on all of those positions because they were the clearing house; very simple.  Even with these examples, unfortunately, you continue to see public sector entities, whether they re state, local agencies, it doesn t matter, getting pulled into this hideous opaque cesspool of structured finance and derivatives.  Our friend, Frank Partnoy at UC San Diego said, The murky nature of the CDO markets present dangers to the unwary investor.  It's particularly unsuitable for public pension money.  I think smoke and mirrors in some cases understates the problem, he says, You can see through smoke. You can see something reflected in a mirror. But when you look at the CDO market, you really can't see enough information to enable you to make a rational investment decision.  That hasn't stopped pension funds from taking high risks with the retirement plans of teachers, firefighters and police. Now, I like to use my mother Joan Whalen as an example for what s going on here, because Joan is an art dealer and she s very well known.  She s got about half a dozen clients and she s also a collector.  So when Joan shows up at an auction, nobody knows who she s buying for or why.  But if you talk to Joan, the real thing anybody in the art market wants is a gallery sale.  Why?  Well, they never disclose the price and there s no competition.  It s just like the other speaker is talking about negotiated versus auctions.  There s good and bad points to each.  But the bottom line about Wall Street and CDOs and derivatives is they set up a gallery.  You could come in and do a quiet transaction with no competition, no reference points, no benchmarks for value.  That s not a good thing and that s particularly not a good thing for public investors. Now, I want to skip forward a little bit -- I've got a text here where you can go over later.  I m going to correct some of the typos thankfully.  That s the wonderful thing about the Internet. But back in the spring of this year, I got a call from somebody at Milwaukee Sentinel, he was very excited.  And he said, Mr. Whalen, all these school districts out here, they went out and borrowed money and they invested the proceeds of $400 million in CDOs, total return swaps, all kinds of things.   And the ostensive reason for this activity was to fund long-term healthcare benefits.  Okay?  And he said, I want to send you a copy of the prospectus, Mr. Whalen.  I want you to read this and tell me what you think.   I said, I don t need to read the prospectus.  You ve already told me enough.  There s no point in going any further.   And he said, Well, what do you mean?   I said, Well, these people should all go to jail.  They have violated the basic rule of a fiduciary.  And moreover, they are engaging in a kind of Zytec [sounds like] which I think reflects a lot of the stresses we see in our society.   We were talking about this over lunch.  What drove the change in the investment rules in states like Alabama?  The unions wanted more benefits therefore the public officials had to find higher returning assets to meet that demand, in the school districts in Wisconsin.  And you know, let s face it, Wisconsin is pretty far North.  They may not be Norwegian but they re pretty conservative.  And when I see people in Wisconsin behaving this way, I kind of wonder what s going on in Texas.  You know?  And I love Texas, I have a lot of clients down there but I don t expect this kind of behavior from people in the upper tier.  It s very disconcerting.  As one local official said, Shawn [indiscernible], there were no documents signed by the district or even presented to the districts prior to the closing that disclosed the true risks of the deal.  There is no way the districts knew or could have known that they were being victimized.  So I think we have all decided today in this session we re having that public sector investment officials are largely incompetent.  They represent people who are definitely incompetent.  Most of our citizens, smart as they may be in their areas of life and their professional careers, really are not focused enough to make investment decisions.  And when you re talking about plumbers and housewives and, God help us, former PTA members, you know, we may need to protect these people.  And let s be fair.  Why do we have securities laws in the first place?  It s to protect the individual investor; that is the SEC s chief job.  It is to protect people who need advice, who cannot make good decisions.  Well, what that means is the people who are giving us advice have to act in good faith.  And I think the examples we ve heard today -- the Wisconsin situation, Florida, take your pick indicate to us that when given a chance, Wall Street will always go back to my favorite phrase, a phrase I learned from a colleague at Bear Stearns years ago, which is yield to commission, okay?  That is the thing that drives all of their behavior.  They know that if they stuff a client and just rip his lungs out and leave him dying on the floor, they could go work at another firm; it s not a problem.  If the hedge fund blows up, you can start another hedge fund.  So, there s a short-term rent-seeking behavior, as Larry was saying at lunch, that we have to focus on because I think as public policy matter, and that s why we re here today, we need to consider whether or not we ought to fix this and what should be done.  Let me make some suggestions as a former General Securities Principal and some of the work as an investment banker for more than 20 years.  First, given the relative inexperience and lack of savvy, evidenced time and again by public sector agencies, it seems to me prudent for the states to impose or restore draconian restrictions and limits on the type of securities and derivatives a public agency may purchase.  Instruments such as CDOs, credit default swaps, any instrument using the word swap or total return or requiring the use of a contract approved by the International Swaps and Derivatives Association should be prohibited explicitly.  Anything having to do with ISDA should be prohibited.  I don t care what it is, even an interest rate swap.  Because, you know interest rate swaps are pretty safe.  But you know what?  These folks could screw it up.  Let s face it.  It s not that hard.  Look at Fannie and Freddie.  That s a fixed-income hedge fund.  It s kind of big which makes it difficult to manage, but in theory, you should be able to do it. Second, I think state pension, as well as private mutual funds, should be prohibited by law from investing in any securities that are not registered at the SEC and either traded on and exchanged or in a formalized, standardized over-the-counter market.  We have these.  The bond market is an over-the-counter market.  It works.  Everybody understands what it is.  These changes would literally force the extinction of the private label securitization, an OTC securities market as we know them today and compel a level of disclosure that at least gives investors a fighting chance to understand that which they buy on behalf of their citizens.  Because let s remember who these people are.  Public sector officials are fiduciaries.  They are guardians.  They have the same duties and responsibilities as conservators.  And I think those people in Wisconsin, on those school boards ought to go to jail, make an example of them. Third, I believe we need to strip the protection of arbitration from all securities firms in their dealings with public agencies and pensions.  Let us never forget again that the state and local pensions represent all of our citizens, virtually all of whom are not competent to make investment decisions.  When a securities firm deliberately preys on public agencies legally charged with acting as fiduciaries for the public, they are attacking our entire society.  These individuals and firms who are involved in these hateful activities should be vulnerable to all forms of civil and criminal claims.  They are not today.  I have been through a lot of arbitration proceedings when I was a member of the NASD.  That s why I m not a member anymore.  When I started my firm in 2003, I sat down with my partner and I said, You know, I think I m going to let all my tickets expire.   In fact, I almost took my test to be a FINOP, a CFO of a broker dealer and I m really glad I didn t do that.  I wouldn t even allow my firm to do soft dollars.  I will not have any business relationships with a broker dealer unless they write me a check. Fourth, I think we need to seriously consider whether or not we should amend the securities laws in the NASD rules to allow for claw backs of all commissions paid to individuals involved in fraudulent activities targeting public agencies pensions, and frankly any investor.  The biggest problem we have today is that people can do bad things with one broker dealer and then they leave.  They go do it with another dealer.  And that trail of liability doesn t follow them.  You do that in the UK and the Serious Fraud Office will put you in jail.  It s just incredible to me that we can let people engage in serial acts of fraud much like that good politician that was described like that in Alabama and there s no personal accountability.  I think speaking as someone who s worked in the industry and has a lot of friends in the industry that I really respect and love, the people in Wall Street who do the right thing, who work hard every day, who try and represent their clients, ought to be clamoring for this.  They ought to be demanding that firms that engage in hateful, fraudulent, even criminal activities, should be put out of business, and I don t mean just the people involved.  Everybody in a broker dealer who s got a Series 24 who s responsible for managing that firm ought to be banned from the business.  You do that a couple of times and you will get their attention.  Thank you. Alex J. Pollock:  Thank you.  An excellent series of presentations.  We covered a lot of ground, both in the specific case and the numerous general cases and at this point, I just want to give the option, not requiring of any panel member to react to anything else anybody else said.  Larry? Larry Lavender:  I just want to say one thing and particularly with regard to what Chris said, and by the way, I know when you said Wisconsin and Texas, you were going to say Alabama but were just being courteous. R. Christopher Whalen:  No, you re east of the Mississippi. Larry Lavender:  When we talk about incompetence and the abilities of the local officials who deal with these things, I want to make it clear that I don t think that they are stupid or foolish necessarily.  They were dealing with people they thought were fiduciaries.  They clearly were not and they should have known they weren t fiduciaries but no local official is likely to understand derivative finance.  I had a slide and I think it s in the package that you got where the County s bond counsel says nobody on the county commission understood derivatives.  Nobody, even at J.P. Morgan, understood them and that he, the County s bond counsel who signed their bond documents didn t understand it.  That s just absolutely correct.  The problem is not everybody knew that they didn t understand them and that s really the difficulty, that s where the problem arises.  It s people who are acting on these things without -- they're relying on what their advisors are telling them and those advisors by and large were, in the case of Jefferson County at least and in most cases, are people who are there to make a dollar and that s what s driving their behavior.  You ve mentioned Frank Partnoy, one of the things in his book F.I.A.S.C.O. is a quote from a derivatives salesman on Wall Street which was recorded in a federal wiretap where he says, It s a funny business.  You just lure people into that calm and then just blank them.   And that s exactly what happens in many cases. Alex J. Pollock:  We ll take Chris and then we ll get to you Richard. R. Christopher Whalen:  The thing I find fascinating about Larry s comment just now and before is that we don t seem to realize or recognize that when we look at finance, there s decreasing opportunities for them to go out and raise money for tangible, real economic activity.  So what do they do?  They create activity.  They create the facsimile of value.  It s like Munchausen Syndrome.  They are literally trying to create a reason for existing and also extracting super-normal returns along the way.  They earn more than most of their clients.  And we ve got to ask ourselves, why do we tolerate this?  I mean, at what point are we going to realize that this has become an ongoing criminal enterprise, in some cases, and take appropriate action?  I say this as someone who has supervised the work of traders and investment bankers.  I ve seen a lot of games and I know what the deal is.  There are some people who try and create value and serve client s interests and there are many who don t care. Alex J. Pollock:  Okay, time s up.  But we have to say Chris, that we all know there s nothing more real than a sewer.  Richard? Richard A. Ciccarone:  I want to say something else.  Just to mention -- after you Chris, on what you just said here.  I think when people let things get too bad or go too long, then they get forced to say, how do I reduce the burden?  And then they look for creative solutions which aren t all very good.  And I think that s what happened of course in Jefferson County, and it happens in a lot of places.  Now, we don t want to get that far.  I did want to mention one other thing though, I think it s pretty relevant to bring up right now, is that there was an actual bankruptcy.  We talk about Jefferson County here but there was an official bankruptcy that has taken place in California for a city of over a hundred thousand, that s Vallejo, California, over a hundred thousand people and the significant new item on that is on Friday afternoon, around 5 o clock Central time -- to me I m in Central zone -- they got the official approval of the bankruptcy court to stay in bankruptcy and that s extremely significant.  The allowance to stay in bankruptcy is probably more important than their actual filing, because now that opens up the window for California communities which have, like Alabama, the right to go bankrupt on their own and the problems there are probably more typical of the systemic risk than they are in Jefferson County because it was stimulated.  The catalyst was the real estate problems that are hitting that community which is not a wealthy community, but it is also those plus labor contracts that they didn t keep a bridle on.  Now we want to pay a good, fair wage to all of our good government workers but when you can t afford what you give, then you run up in a problem that s tomorrow s problem just like deferred maintenance is.  So I just think it s important that we submit that in this panel as well. Alex J. Pollock:  I agree.  Dave? David R. Kotok:  Just to second that.  Thank you for raising that.  The ability to stay in bankruptcy which we ve seen in the case of airlines, which start out going into bankruptcy for one reason, and Vallejo got in trouble because of labor contracts, because they were very, very inclined to compensate municipal employees.  But imagine if once they can stay in bankruptcy, they then begin to use the tools for other things.  So they got there one way and they re going to stay there and find out it s a nice place to be for a while, and that becomes a whole different set of affairs. I just want to make two observations.  Joe said that he believes that the shift in municipal bond issuance which was roughly 50 percent insured and 50 percent uninsured is going to be something like 90 percent uninsured.  The insurers, as we know, got in trouble not from insuring municipal bonds.  They got in trouble because they went outside of their business models and they started to insure other things.  During the period of time when insurers stayed in their bread-and-butter business and there was a plethora of triple A insurers and we were respectful of the triple A rating, bond insurers served useful purposes because in the negotiation of the bond insurance contract, the insurer became the disciplinarian of the municipal issuer.  The insurer said, We re not going to insure you unless your coverage ratio is X.  We re not going to insure you unless your unexpended proceeds clause is Y.  We re not going to insure you -- well, I ve negotiated those. Male Voice:  [inaudible] negotiating with the Jefferson County [inaudible]. David R. Kotok:  Let me get to my point.  So there was a period of time in which bond insurers earned their premium because they were able to affect a sale - that s because the general public wouldn t do their homework and was lazy about credit research.  But at the same time, they served a public purpose.  The public purpose was to act as a disciplinarian on a municipal issuer.  That gave way to the present circumstances.  It gave way to the competition for premium and the bending of the role of the bond insurer which looked less and less to the structure of the contract.  Now we have a situation in which there are only two bond insurers and they are trying to retrieve in premium 45 percent of the expected savings in a bond issue, which is an astronomical amount.  But the point I want to make is, there was a time when you could do negotiated offerings because you had to do a negotiated offering if you had to negotiate contracts and you do have to do negotiated offerings if you have to do refundings and various other types of financing where it s necessary to have a negotiated offering.  And under those circumstances -- we ll disagree, reasonable people can disagree -- under those circumstances, bond insurers served the useful purpose which we now have lost and they were disciplinarian of sorts on municipal issuers. R. Christopher Whalen:  But David, not everybody has you negotiating for them; that s the problem. David R. Kotok:  We can talk about that. Alex J. Pollock:  All right.  Now we re going to open up the floor to questions from you all.  Let me tell you what the ground rules are.  We have -- where's our microphone?  Here, Karen.  We ve got the microphone.  Please wait for the microphone.  Identify yourself please with name and your affiliation and then ask your question.  If you feel compelled to make a statement, keep the statement short and get on to your question.  We will start with the front row right here.  Wait for the microphone to come up. Kenneth Rothschild:  Okay, I guess it is.  Very interesting. Alex J. Pollock:  Could you identify yourself please to start? Kenneth Rothschild:  Yes, my name is Kenneth Rothschild.  I m speaking just for myself, not for any institution.  Okay, first, part of the problem and I m not going to -- I'm going to ask questions, but part of the problem is that industry has affected too much politics and we don t have proper oversight in many areas.  Okay.  Two, what we re talking about is a general problem throughout our economy right now.  We re just focusing on municipal bonds. Okay, here are my specific questions.  What is the situation now with municipal bonds?  In other words, people want to know, if these things go into default, in anything goes into default, where does the state stand in backing a county?  If a county goes bad, the state s going to be jeopardized.  As we all know, our infrastructure is in dire need of repair in many different areas.  We can t let the municipal bond market go bad.  So, specifically, what does default mean?  Does default mean the asset loses value?  Does it mean it will never pay off?  Does it mean you just have to hold it and eventually you will get your interest?  And what is going to be the position of the state governments and the federal government, because if they let these things start to go, it s only coming back to the federal government. Alex J. Pollock:  Okay, we re going to stop with a very good question that you ve asked there.  Who wants to have -- Larry, you want to take that? Larry Lavender:  In the Jefferson County situation, the state or anyone else has absolutely no obligation but the generic answer is it depends on the indenture, which is a legal document that says what resources the bondholder has access to.  In Jefferson County, it has access to the net revenues of the sewer system, period.  Nothing else.  The documents are very clear about that. I would like to say with regard to the first part of your question or statement, the one problem that, sort of, underlies everything we ve said that no one specifically stated is that the basic problem here is mispriced risk.  We ve talked about how we got there but that s the problem.  The risk was mispriced, whether it s by rating agencies who looked at Jefferson County, and I simply cannot understand how they could have been willing to rate with 94 percent variable rates in one-to-one coverage.  I don t know how they could have given those a rating, but that s the problem.  It s mispricing of that risk, and in this case, the rating agencies passed it on down the line to other people. Alex J. Pollock:  I saw four original hands and I m going to move from my left to right to get the first four. [Inaudible] Alex J. Pollock:  No, I m sorry.  Well, we have to move on to the question.  You can come up afterwards and talk some more if you want.  Yes, sir, right here. Christopher Taylor:  Hi.  My name is Christopher Taylor.  I m a former Executive Director of the Municipal Securities Rulemaking Board.  David, I take issue with your considering insurance companies as disciplinarians in the market.  They may have been very, very early on but as typical with various aspects of the Muni business, every time there are excess profits, which there were in the insurance business and you got other people coming in, you suddenly had a commoditization of the product and that insurance discipline went away.  It sure as heck went away in Jefferson County because that stuff was insured, and if those guys were playing disciplinary role, I sure don t see it.  So, I take strong issue with the thought that the insurers are going to play that role ever again. Alex J. Pollock:  Dave? Christopher Taylor:  As soon as they get profitable, they re going to get competition. David R. Kotok:  Well, if Joe is right, the municipal bond insurance industry is wounded for a very long time and it s going to take a long time for it to rehabilitate itself.  In my experience, and that experience is on three different boards, issuing billions of dollars of municipal bonds, and separately, a division of our firm which was an independent, not associated with any underwriting firm, advisory firm on issuance -- we didn t get hired often because they don t want independents, those insurance contract -- Joseph Mysak Jr.:  I m shocked, shocked. David R. Kotok:  Yes.  And those insurance contracts had disciplinary characteristics.  They helped and they did serve a function.  It doesn t mean that they all did, but they do.  And even now, if you go to Warren Buffett s firm, if you go to FSA and say, I want to sell this new sewer bond and I only want to cover one time, I don t want 1.2, they won t insure you.  They ll impose the discipline.  So the good insurer which is looking out for himself and his risk still practices discipline.  And the bad insurers who are in the shoe business successfully went in to mortgage shirts and they lost their shirt. Alex J. Pollock:  Okay, I have a question here, Bert, and then we ll come over here. Bert Ely:  Bert Ely, banking consultant.  Ten days from now, AEI is going to hold, in this room, a conference on covered bonds which about $3 trillion outstanding in Europe, and ten days from now, we ll be talking primarily about covered bonds as it applies to residential mortgages.  But in Europe, covered bonds are used extensively for the financing of public infrastructure.  In effect, it represents an alternative to municipal bond issuance in this country.  Has anybody on the panel looked at all at how European countries are financing their provincial and local infrastructure and the extent to which covered bonds, purchased by banks and other financing institutions, are used and does anybody have any sense of the relative efficiency and safety of covered bonds as the funding source for municipal improvements relative to municipal bonds in this country?  And I ask that because just as in the mortgage area, we may see some fundamental changes in how we finance homes in this country, possibly we re at that point too, with regard to financing municipal infrastructure. Alex J. Pollock:  Anybody want to take that one up?  Chris? R. Christopher Whalen:  I ve started, unfortunately, spending a lot of time with European banks.  I shouldn t say unfortunately, it s interesting, but they re very different.  And the one thing I would say, Bert, and it s just a speculation on my part, is I m not sure the Europeans have any choice.  In other words, I don t know that there s another market in Europe that could shoulder the burden of financing public sector infrastructures so they go to the banks. Alex J. Pollock:  One -- go ahead, yes, Larry? Larry Lavender:  At the risk of putting my financial services hat on, we started looking at this about a year ago, and it s going to be on the agenda in the next Congress.  The principal distinction, of course, is that these bonds don t leave the balance sheet of the banks.  The losses remain on their balance sheet and therefore, they are concerned about them and you don t have as much problem as you ve had with the originate-and-distribute model, which is how a lot of the problems that we re experiencing now came about. Alex J. Pollock:  For me, in municipal finance in general, I mean just asked to the panel, what we have the problem of how you re going to have these be qualified, tax-exempt instruments if they re on a balance sheet of a bank, being funded by the bank s taxable borrowings?  I don t know how we d get the tax characterization that the U.S. market wants anyway.  [Indiscernible] let s not debate but at least that d be something to think about.  Question right here. Neil Roland:  Neil Roland, reporter at Crain s Financial Week.  We talked in terms of culpability. primarily about the locals and the credit rating agencies.  Isn t [audio glitch] just specific, J.P. Morgan Chase as culpable, if not more culpable than anyone, true or false?  B, if so, what do you see to be the main components of a fair, regulatory settlement with them? Alex J. Pollock:  Anybody want to try on that one? R. Christopher Whalen:  Let me go first, but I think David should say something about this.  The Street withdrew from -- Alex J. Pollock:  You re not allowed to call on other panelists. R. Christopher Whalen:  The Street withdrew from municipal finance for a lot of reasons but one reason was mark-to-market accounting.  They didn t want to take losses.  They pulled back.  That was it.  They did not want to take the capital risk.  Why should Wachovia walk away from municipal bonds?  It makes no sense at all. David R. Kotok:  If the disclosures are transparent and understood.  If the purchaser on one side of a contract engages, or has the option to engage, a qualified consulting professional to help explain, if they don t understand the complex instrument, and if all that occurs, then culpability becomes an interesting debatable question.  And as to what a fair settlement is, it ll be whatever parties agree or else it ll be dictated by a bankruptcy judge.  It ll be one or the other. Alex J. Pollock:  More questions?  Right here, please.  This gentleman right here if you get the mic over. Paul Horn:  Paul Horn.  I m an international independent market economist, retired Managing Director of Smith Barney/Citigroup.  Chris, I have a lot of admiration for you for being tough.  You also almost mentioned the word regulation.  We don t have regulation in the insurance business.  We ve to date -- cross your fingers -- have no great problems in the insurance business, there may be some.  Banking business, the fed has finally recognized systemic risk and may be given responsibility after Mr. Paulson resisted that until August of last year.  I m just wondering where you all stand with the whole idea of consciousness and responsibility for supervising such activities, whether it s Jefferson County or Jaime Dimon, when systemic risk -- my old boss -- when systemic risk is involved here.  None of you like regulation but regulatory -- sensible supervision I would call it, seems to be the answer to me and is responsible for David s chart. Alex J. Pollock:  The question is, what about regulation of systemic risk in this municipal finance area?  Anybody want to comment on that?  Richard? Richard A. Ciccarone:  -- [Audio glitch] on the impact or the relationship it has to the issuers themselves.  Some of you may know this already, I know Kit and Martha [sounds like] are well aware of it.  The Tower Amendment, that came in after New York City, prohibited regulation, so we have that issue to deal with.  We have a self-regulatory with the MSRB of the dealers.  But when you get into the heart of this question, we really have to take a look in saying, is it needed -- these are securities sold in the marketplace, interstate commerce is done.  We really need to see if we can toughen this up, because there s a study that just came out last week by one of the national repositories on information dissemination and, of course, there s been some criticism of that study.  However, what I think was important on that study, it said that only 50 percent are complying with the disclosure information that s being released to the marketplace, it was supposed to be released to the marketplace in a timely fashion relative to their financials.  Well, how are we supposed to spot any problems at all if we can t get the financials on time?  And so although I was a proponent, like most of my associates, of voluntary, I ve really come in to way that we just have not done a good job of policing ourselves, nor has the government s done a good job of policing them.  Now, the leadership of the GFOA, most of the leadership are very good disclosure executers, and therefore, they ll go up and they ll tell you there s no problems there.  Well, the truth is most of them are good.  The problem in the study that came out from last week showed that it s the infrequent issuer, it s the private activity issuer, smaller issuers, usually the more risky issuers that are the problem.  And so, that s too much to leave on the table.  If you look at the disclosure on Jefferson County, that s going to be an issue.  We talk about litigation, I m sure everybody will go in and look at, was it properly represented with all the risks.  If you look at the audit that just came out on Jefferson County, you ll find the discussion on the derivatives in the back and it s not one you want to read.  They re very difficult to read and most individuals would never be able to understand it, get anything out of it.  Now, there are rules about this but we need to do more, and so, -- I mean, I m open to the possibility that we would have regulation in the industry to cover those kinds of issues. Alex J. Pollock:  Dave is next. David R. Kotok:  My friend Paul Horn and I sit together on the Board of the Global Interdependence Center, a Philadelphia-based think-tank and sometimes we have very heated discussions. Alex J. Pollock:  Unlike here where the discussions are always cooler [cross-talking]. David R. Kotok:  I m sure they are.  We re going to get regulation whether we want it or not and we re going to get rules and they re going to change whether we want it or not, and the issue that -- I think we talked about it at lunch, and that Richard you raised and Chris has can there be accountability with penalty on the part of municipal officials and the people who advise them?  Can local counsel, who says, Well, I don t understand finance.  I only understand local municipal law but I ll sign off on the document, be exposed, let alone bond counsel, financial advisers, people who write documents.  If we add to regulation, your suggestion, penalty under Singapore law, we might be able to improve this circumstance. Alex J. Pollock:  I m going to -- let s hold because I m going to come back to more questions, but on that, I can t help telling the story on the subject of systemic risk at a Senate hearing a month or so ago.  Chairman Bernanke was testifying and suggesting that the Fed should oversee systemic risk, and Senator Bunning had this wonderful line, he said, Mr. Chairman, I understand you want to oversee systemic risk, he said, but I think you are the systemic risk.   [Indiscernible].  Next question?  Yes, back here.  Right here. Chris Banks:  Thank you.  I m Chris Banks with Itochu International.  You had started to have an interesting debate about the future role of the municipal bond insurers and I wanted to get all the panelists comments.  Number one on, do you agree with Mr. Mysak s prediction that insurers will only be about ten percent of the market for the foreseeable future?  And secondly, what are the prospects of any sort of federal bail-out of the existing municipal bond insurers? Alex J. Pollock:  All right, Joe you want to -- we know you agree with your prediction of the 90-10, but how about the second part of the question. Joseph Mysak, Jr.:  Yes, it may take a thousand years before the insurers come back to the market.  But the whole business about a federal bail-out, I think that the -- not a federal bail-out but the New York state insurance regulators are trying to cobble together some sort of plans to rescue insures.  Whether that ll be successful, I doubt it. Alex J. Pollock:  Chris? R. Christopher Whalen:  Ambac just established a new subsidiary which they have received approval from the State of Wisconsin to begin operations.  They re going to start writing new business because they can t write business with the old subsidiary.  Nobody will do business with them with their current rating.  I think the thing that I ve learned from talking to David and others about this is that by getting into credit default swaps, the municipal bond issuers ruined a wonderful thing.  You know, the rate of return on their old business was in the mid-high-30s and that s not bad.  They didn t make that kind of money even at the best of times on credit default swaps so they were really stupid.  And they may have broken their own business model.  It s unclear.  I think the issuers in some cases may be just as happy to go to market without insurance because you know what the economics of the deal are, don t you? Alex J. Pollock:  [Audio glitch], question? Male Voice:  By the way, Connie Lee [sounds like] was just an interesting anecdote.  Connie Lee was chartered here in Washington by Congress for the purposes well, Fannie Mae, I guess it was, worked with Fannie Mae. Larry Lavender:   No, and hell no. Alex J. Pollock:  Microphone over here please. Andrew Ackerman:  I could yell. Alex J. Pollock:  No, that s not allowed.  Yelling is not allowed at AEI.  Yes? Andrew Ackerman:  Andrew Ackerman with the Bond Buyer newspaper.  I just have a question for Mr. Lavender.  Could you talk about what types of additional regulations Representative Bachus might support in terms of the municipal market? Larry Lavender:  No sir, I m not going to talk about the Financial Services Committee with regard to this. Andrew Ackerman:  Okay. Alex J. Pollock:  Want to try one more? Andrew Ackerman:  Yes.  Can the panelists talk about what changes might need to happen for -- what type of regulation you think would improve the market?  Repealing Tower, amending Tower?  Maybe, Mr. Lavender can talk about his personal views on Tower? Alex J. Pollock:  Looks like Chris is volunteering. R. Christopher Whalen:  We don t need a lot of new regulation at the lower level of the market.  We need to enforce the current rules on disclosure.  I think the issue that we ve all talked about during this whole program is complexity.  When you have too much complexity, it s very difficult for anybody to say that they re sufficiently well informed to actually manage whatever it is, right?  We have this image in our minds of institutions that are governed by logic and purpose and that are managed efficiently and diligently, but the reality of life is different.  The short run is always chaotic.  The long run looks rational.  And our great scientists and philosophers took the fact of long-term stability in terms of events and they imputed that short-term events are also rational and they re not.  That s what we re learning today.  So, if you limit complexity, force everybody to register with the SEC, well, they re not going to allow the broker dealers to do most of the deals they do in the registered form because the investors would never understand it. Alex J. Pollock:  Now, we ve got Dave and then Larry. Larry Lavender:  -- in your last question is I like power very much when I have it. David R. Kotok:  I would say one additional thing.  Do you make a loan to someone based only on a FICO score or do you look at other characteristics of the credit?  If you re looking at municipal credits, do you rely on a single three-digit rating or a four-digit rating, or do you look at the characteristics of the credit?  We have, in our firm, probably 2,000 to 3,000 municipal bonds.  We have people who follow up the credits.  They call the trustees and they say, We didn t see a filing on time.  You re the trustee.  And by the way trustee, how many other calls did you get like this?   And we find out the answer is, You re the first.   And as soon as we say to the trustee, In your capacity as a fiduciary, representing my client, the bondholder, you will receive from us, a letter, within about three days pointing out that the filing is incomplete.  We ll be back to you in a few weeks.   That s the discipline you deal with credits and that s what s been missing in the municipal bond arena for decades because of the reliance on three little letters.  One letter, three times, AAA.  And that s now being restored.  That s a good thing.  Will this pendulum perhaps swing too far?  Yes.  Will we go through turmoil?  Yes.  Is this a good thing?  I think so.  And no regulation, no regulation can replace hard work on credits.  That s the only way to do it. Alex J. Pollock:  Next -- hang on.  We want to pick up in the back and then I ll get to you.  You ve had a turn.  This in the back and then, could I have a hand over here?  Okay, we ll get to your turn. David Woodford:  Hi, I m David Woodford with Fortune Magazine.  I m just looking for some predictions here.  On the one hand, we have a debt which apparently cannot be paid.  On the other hand we have a civic function that can t be withdrawn, absolutely essential to civilization in Birmingham.  How is this situation going to be resolved? Alex J. Pollock:  Okay, who is going to take up the prediction of what s going to come out of the -- Joe, we did a -- Joseph Mysak, Jr.:  The consensus was the lenders and the issuers have to negotiate because otherwise they re going to talk to the bankruptcy judge.  They have a choice.  It s very clear.  I think they have more flexibility before they file. Alex J. Pollock:  Well, to be a little more precise, it was a consensus from the creditor s point of view, it s less bad to make a deal and take a haircut in the deal you made than to put your fate in the hands of the bankruptcy judge and therefore the likelihood where some kind of a deal where people are going to take a serious hit but make a deal.  Yes? Thomas Donlan:  Tom Donlan with Barron s Weekly.  Chris, I bow only to you in my willingness to see people on Wall Street who abuse their trust go to jail but I wonder at the remarkable amount of sympathy that the panel shows to the issuers who are clearly at fault in these cases.  And I m also amazed that the entire panel was able to get through an hour and a half of discussion and never use a term that became famous not too many years ago, namely pay to play.   The municipal expenditure business has been full of corruption in every state but I m sure that David and I could share some New Jersey war stories without too - and spend a lot of time.  There s very few of these institutions that are truly trustworthy.  Why should they not be liquated in bankruptcy when their failure to be worthy of trust has been so obviously demonstrated? Alex J. Pollock:  Somebody -- Dave, do you want to try? David R. Kotok:  No argument from me on why you should liquidate.  No argument from me on why you shouldn t throw out officials who run organizations and get in this trouble, and no argument from us on pay to play.  The MSRB at least attempted to hit it, and they hit it with underwriters.  Did they hit it with the person who prints the official statement?  Did they hit it with the auditor?  Did they do it with bond counsel?  Did they do it with general counsel?  Did they do it to the 15 other vendors who were solicited for political contributions?  I sat in rooms and watched people say, I can t ask you for money for the municipal entity, but I want to tell you that my good friend over here is running for Congress and that s a federal office and he d really like to have a thousand from you, a thousand from your wife, a thousand from your accountant, a thousand from your lawyer, and a thousand from your insurance agent, and here are five tickets to the fundraiser.   But this is not a municipal entity and doesn t violate the MSRB rule.  You re right about pay to play.  Let s use Singapore law on pay-to-play violators.  And we ll cut back on it. Alex J. Pollock:  Now, we have time for one more question and you re going to get to ask your question now up right here. Male Voice:  I just wanted to ask who is it who pays for the ratings.  In other types of non-muni business for instance, it was we who paid for the ratings, not the investor. Alex J. Pollock:  Richard?  Push your button Richard. R. Christopher Whalen:  It s the issuer.  There ve been many sessions here at AEI talking about ratings and there are people who believe you can have a consumer-based rating system but, the truth of the matter is, buy-side customers don t like to pay for anything.  They think everything is free.  So in order to get the infrastructure on the buy-side with shops and firms that are aligned with buy-side investor interest, you ve got to pay them.  Otherwise, they re not going to do it. Alex J. Pollock:  Richard, anything to add? Richard A. Ciccarone:  No.  Absolutely, the issuer does pay.  I guess that s been subject of some Congressional hearings was -- you know, it s interesting that just about a year ago, I think there was some Committee hearings on that and at that point in time they thought that maybe that wasn t a good idea to have the issuer pay anymore and it is not been even a year when their Congress came out and said, We need higher ratings.   So I find an irony in that and it s not too pleasing to me. Alex J. Pollock:  On that note let me thank you all for being with us and let s show our appreciation for the outstanding panel. [End of transcript]      </body></html>