Circular bidding to fix the bond market?

Bob Moon Feb 28, 2008
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Circular bidding to fix the bond market?

Bob Moon Feb 28, 2008
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TEXT OF STORY

Lisa Napoli: The bond auction market that’s vital to funding everything from road projects to student loans is still struggling to survive. Now, federal regulators are being urged to get behind a plan that some bond sellers are pushing as a short-term fix. Marketplace’s Bob Moon says it would allow them to enter the bidding — to buy back their own IOUs.


Bob Moon: Maybe the fix is as simple as just taking it all back, the way Gilda Radner used to, on Saturday Night Live:

Gilda Radner: Never mind!

That’s what bond issuers could tell investors. By sweeping their cards off the table and declaring the game “over,” the bond sellers could escape the shock of hundreds of millions in interest penalties as their auctions fail to attract any takers lately.

University of Maryland economist Peter Morici says, hold on. Huge investment banks have led customers to believe the banks would always step in to keep the auctions running smoothly. Now he says they want to change the rules in their favor.

Peter Morici: Going in there and manipulating markets is not a good way to honor your moral or legal obligations.

A coalition of bond issuers wants the Securities and Exchange Commission to shield their circular bidding from being considered market manipulation.

Duke University securities expert Jim Cox thinks looming economic damage might persuade the SEC:

Jim Cox: Given the breadth of the problems, my guess is this is almost bordering on the “too big to fail” principle.

But Professor Morici argues a corrupt marketplace deserves to fail — though he says he’s come to expect regulatory laxity.

I’m Bob Moon for Marketplace.

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