In general, in the lending process and when you try, as a municipality or a public entity, to take out a loan or do a bond issue, you have to be very careful. Because obviously, in this borrowing process, there are two camps. On the one hand, the borrower, i.e. the municipality, which aims to obtain the lowest possible interest rate in order to save money and to manage public money well. On the other hand, the bank or, in the case of bond issues, the investors, who have an interest? It is in their interest to place their money at an interest rate as favorable as possible to them, at a higher interest rate. Obviously, we have a conflict of interest here, a conflict of interest that can be successfully mediated so as to strike a balance between the high interest that the investors want and the low interest that the City wants.
But you need to be very careful, because in general all the services related to taking out a loan or taking out a bond issue are quite difficult to define by the city hall’s own staff. Then there are all sorts of tender documents and all sorts of tender documents for either the purchase of banking services or the purchase of intermediation and bond issuance services, where this potential conflict is not taken into account, so that the bank or the intermediary (broker), in the case of a bond issue, is basically invited to build the loan structure to meet the needs of the local authority. The bank or the broker cannot be advisors for the municipality because they will represent the interests of the investors, they will want to get the highest interest rate and they will make you, as the municipality, the specifications in such a way that you will pay a higher interest rate than you should in reality.
In the United States, this phenomenon is very well regulated, it is written in black and white in the regulations of the Security Exchange Commission (a kind of Financial Supervisory Authority in our country, ASF), it is very clearly written that the consultant hired by a city council must represent the interests of the city council exclusively and cannot subsequently switch to the other side, to the investors. In other words, it cannot buy financial instruments issued by the municipality in its own name or through proxies. Moreover, there are famous cases tried in court, that they didn’t come to this conclusion ad hoc either, but after having had several trials, in which brokers who advised the issuer ended up in jail because, on the other hand, they tried to obtain undue advantage, in Romanian parlance, actually higher interest rates for investors. So in Romania, even now, we find issuers turning to brokers and banking institutions to protect their interests. Get advice from these banking or brokerage institutions.
Unfortunately, they’re putting the fox in the henhouse and this is happening at the taxpayer’s expense.
