Mr. Rogers is Business and Financial Editor of the New York Herald Tribune in which this column appeared, November 17, 1961.
The Investment Bankers Association of America will hold its 1961 convention in Florida starting November 26, and no matter what has been scheduled for consideration, one of the first items of business should be full discussion of the federal government’s deliberate and dishonest intervention in the private banking industry in the case of some sewer bonds for Charleston, West Virginia.
Seven investment bankers submitted competitive bids for $4 million worth of Charleston sewer bonds. The lowest bidder, it turned out, was the First Boston Corp., one of the most respected private investment banking firms in the nation. Its bid was for 3.945 per cent.
While Charleston city officials were opening the seven bids, the process was being observed by an engineer employed by the Community Facilities Administration, a subsidiary of the Housing and Home Finance Administration, headed by Robert Weaver. This engineer, having determined the amount in the lowest competitive bid, then offered to handle the loan for 3.375 per cent, lower than First Boston, and lower, in fact, than the government can borrow the money to handle the loan.
We will deal in a minute with this dishonest procedure, this violation of the ethics of competitive bidding, but before we shed many tears for the investment banking industry, let’s consider what this means to you and me, ordinary taxpayers.
It means that you, wherever you live, are paying for Charleston‘s sewer facilities. You had no choice in the matter.
This Community Facilities Administration, one of the lesser-known agencies grouped around the Housing Administration, is empowered to lend up to $650 million for public improvements to communities which can’t borrow from private sources at “reasonable rates of interest.”
First, no one has said Charleston‘s credit is no good. It’s good enough.
Second, no one has said the seven bids submitted for the sewer bonds, were not “reasonable.” Charleston needs a larger sewer system. In the ordinary course of events it called for bids on $4 million in bonds to finance it. When First Boston’s bid of 3.945 per cent interest was declared lowest of the seven, the CFA engineer, on the spot, decided this wasn’t reasonable and offered to lend Charleston the money at six-tenths of a cent less. The city then threw out all of the bids of the private lenders.
A “Reasonable” Subsidy
Where does the CFA get this money?
The government borrows it. The money the government is borrowing now costs more than 4 per cent. This means that the CFA will be carrying this bond issue at a loss of more than $20,000 per year, plus all of those high housekeeping costs they have in the federal bureaus.
So what the CFA considers a “reasonable” interest cost is one so low that the lender loses money on it. The lender, friend, is the taxpayer, and that’s you. So as things stand, Charleston‘s new sewage system will be paid for in part by millions of Americans who will never pull the plug in a bathtub in Charleston, West Virginia.
I’d like to make arrangements like that for handling the mortgage on my house. Anybody want to help me? No? Then why help the people in Charleston with their sewer?
So, back to the banking industry which is the directly injured party in this little exercise of liberal New Frontierism. Senator A. Willis Robertson, D. Va., asked Dr. Weaver, head of the Housing complex, if he wasn’t actually saying that a “reasonable” rate was only the rate the CFA would charge for a loan (which, remember, is a rate handled at a loss).
No, replied Dr. Weaver, he had determined that “an interest rate is to be deemed reasonable if it does not exceed 37/8 per cent and if the loan is repayable over thirty years or more.”
Well, now, First Boston’s rate of 3.945 per cent was based on a repayment term covering thirty-nine years. It was not only reasonable, it was most favorable.
If anybody doubts this, just consider that bonds of the United States government, with a shorter maturity, were priced at the very same time of the First Boston bid, to yield over 4 per cent.
Truth is, this is a blatant violation of the principles of competitive bidding, and it is a bulldozing attempt to have the government step into direct competition with private industry. There can be no other interpretation.
©1961, New York Herald Tribune Inc. Reprinted with permission.
