Yesterday Christopher “Kit” Taylor, the former executive director of the Municipal Securities Rulemaking Board, became one of the few regulators to publicly apologize for his role in the crisis. Like many public officials, he worried for years about the explosion in the unregulated derivatives market, which he was in the unique position of seeing bankers pawn off on slightly less sophisticated investors than the usual hedge fund guys: school districts, park authorities, power companies and other local government entities. Today Detroit, Jefferson County, Alabama and various towns in California alone are out more than a billion dollars after investing in interest rate “swaptions” and other financial “products” that left them on the hook in a national conspiracy through which banks, lawyers, consultants and corrupt politicos bilked as much as $4 billion a year from state and local government coffers. But “the big firms, he told Bloomberg yesterday, “didn’t want us touching derivatives…they said, ‘Don’t talk about it, Kit.'”
“Every time I talked to the board about swaps, I made it clear that the MSRB had no authority to take action,” said Taylor, in an e-mail. “My ‘regret’ is that MSRB would not speak out loudly that swaps were going to cost taxpayers a bundle if issuers did not clearly understand what they were doing.”
Perhaps as penance, Taylor has been a main source for most of the media coverage of municipal finance corruption, currently the subject of a federal probe, and his candor has been hailed by his former colleagues in financial regulation, oh wait not really.
Yesterday after the Bloomberg story broke Dow Jones called Taylor to follow up.
[Taylor] said he had just gotten off the phone with someone who told him, “Stop talking. You’re smearing the whole industry.” The caller, he said, was a former MSRB chairman, whom he wouldn’t identify.
That’s right, Taylor is smearing the industry! (As opposed to a decade of corrupt practices that have sent numerous bankers and public officials to prison and sullied the careers of politicians as prominent as New Mexico Governor Bill Richardson.)
But Taylor doesn’t blame his old pal; he thinks the problem is “systemic”, as they say:
Formed in 1975, the MSRB has 15 members, but its board is dominated by the banking industry and securities dealers, which account for 10. The other five are public members, one of whom is supposed to represent issuers, one investors and three of whom are non-affiliated.
Taylor said he also ran into difficulties with the board because of his insistence that public members have no connections with the municipal industry and never made money from the industry. The public members, he said, were supposed to be “the conscience” of the board, but one now is a former member of a bond insurance firm, “and bond insurers weren’t representing investors.”
Incidentally, the board of the New York Fed is set up in a similar way. And serving as its public “conscience”: former Goldman Sachs chairman Stephen Friedman. The MSRB denied Taylor’s allegations as fast as you can groan “disgruntled former employee.” Here’s hoping former New York Fed president Tim Geithner feels his disgruntlement.
