What a waste of a talented human being
G., P.
What a waste of a talented human being If your father used to remind you that "money doesn't grow on trees," he obviously wasn't into arbitrage. Imagine that you could take out a...
...It's really become a young person's game...
...Letters...
...The bond industry caught on to this money tree in the early sixties, and by the middle of the decade, hundreds of millions of dollars in state and local arbitrage bonds—issued for no reason other than to play the tax-exempt spread for profit—was heading to market...
...I'm 44 and the second oldest person in this firm...
...bond counsel firm...
...He's a computer genius...
...He could do a lot more creative things than sitting around worrying about arbitrage compliances...
...The pace is just terrific," he tells me...
...Guys like Ritter are smart enough to understand where holes are in the regulations and exploit them," the official says...
...To stop these arbitrage abuses, the Treasury in 1969 added provisions to Section 103 of the Internal Revenue Code, denying tax exemptions for the interest on arbitrage bonds...
...Neat, huh...
...Arbitrage is an arcane, difficult, miserable area of the law...
...That's arbitrage...
...it was the states and municipalities as well...
...at an investment banking house is about 35...
...I drafted the original 103 regulations as a staff attorney at Treasury," recalls Ritter as he leans back in his chair and stares out of the window of his office in Washington's law office canyonland...
...tax counsel find new holes, and the cat and mouse game goes on...
...Treasury lawyers try to plug the holes with more regulations...
...Now Willis is a very creative guy...
...The difference, or "spread" between the rate you paid on the loan and the rate you received on the Treasury bonds would be pure profit...
...The average age of a senior v.p...
...He sees complex revenue flows in his head...
...Today, he is reputedly the best "special tax counsel" money can buy, helping municipalities make arbitrage profits without running afoul of the regulations he helped create...
...Like many people in the municipal bond business, Ritter seems tired and overworked...
...It wasn't just the federal treasury that would lose out on this debt...
...Some people are the world's best solvers of crossword puzzles," says another Washington bond counsel...
...Willis finds avenues through it that are legal" Arbitrage law became this arcane and difficult largely because of the Treasury's attempts to keep up with lawyers like Ritter...
...The regulations Ritter drafted, like all tax laws, were open to creative interpretation...
...Meetings, Drafts...
...An official familiar with the department's procedures explains that Treasury lawyers are always "half a step behind" the latest schemes...
...But he's really in demand...
...Imagine that you could take out a taxexempt, low-interest loan, and use it to buy Treasury bonds yielding a higher rate of interest...
...Eventually, unbridled arbitrage would dump so much extra debt on the taxexempt market that the spread between municipal bonds and U. S. Reasury securities would disappear, taking with it any advantages state and local government borrowers traditionally enjoy when building roads and school houses...
...P.G...
...Willis is the world's best solver of arbitrage problems...
...But the laws didn't work very well, largely because of the clever minds of people like Willis Ritter, who today is a partner with Haynes and Miller, the Washington, D.C...
...A few years after he drafted them, Ritter himself went into the interpretation business...
...The result is a body of law that President Reagan's first assistant secretary for tax policy once described as "just a mess" and "almost beyond comprehension...
...Willis makes a fortune doing arbitrage compliances," says a young municipal banker in New York, shaking his head...
Vol. 17 • February 1985 • No. 1
