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GENTLEMEN PREFER BONDS

FOR THE FIRMS THAT CRANK OUT DIA'S FINANCIAL PAPERWORK, THE PROFITS ARE SKY-HIGH -- AND THE WORK IS ALL LEGAL.

Last week's decision by the New York rating company Standard & Poor's to downgrade Denver International Airport bonds to "junk" status was bad news pretty much all the way around. Mayor Wellington Webb, already reeling from a steady fusillade of embarrassing headlines, suffered yet another blow to his reputation as a manager. The mutual funds, insurance companies and others who've bought the bonds over the last few years saw the value of their investments tumble downward. The airlines and travelers who will use DIA faced the prospect of higher interest rates on any new bonds issued to pay for the airport--an increase in costs that ultimately would be passed on to them.

One group, however, had no real cause for alarm: the elite clique of lawyers who do DIA bond work. In fact, the attorneys had reason to celebrate. Despite S&P's decision, Denver Revenue Manager Patricia Schwartzberg said the city intends to forge ahead with plans to refinance millions of dollars' worth of airport bonds this summer. The lawyers slated to work on the reissue stand to reap tens, perhaps hundreds, of thousands of dollars in new fees.

Though a pittance compared with the billions spent on the new airport, the legal costs of DIA bond issues over the last four years have already reached staggering heights. Six different law firms--at any one time--have been engaged on most of the thirteen new issues and remarketings of DIA bonds since May 1990. The legal bill thus far: well over $4 million.

No taxpayer money has been used to pay the firms; their fees come entirely out of the bond debt itself. But some critics argue that, no matter what the source, bond fees for large-scale projects like DIA tend to be much higher than they need to be. The attorneys hired to churn out legal documents on bond issues "don't do anything," says Wayne Marr, a finance professor at South Carolina's Clemson University. "[Their work] is basically legal window-dressing."

The situation in Denver is further complicated by the fact that all six firms currently doing DIA bond work have contributed money to Webb's election fund--and that three enjoy especially close political ties to the mayor. Partners in two of the firms have had serious legal troubles--one for misusing trust-fund money, the other for nonpayment of taxes and the use of marijuana and cocaine.

Airport bond work is "a gravy train for the mayor's buddies," says Michael Boyd, a Golden airport consultant and a virulent DIA critic. But attorneys who work in the field insist that bond work is difficult and painstaking--and worth every penny. They say firms take huge risks every time they take on a municipal securities job, since mistakes can lead to crippling lawsuits by investors. Reducing the firm's risk requires hundreds of hours of meticulous work and fact-checking, as well as the payment of huge malpractice premiums. That can drive legal fees sky high.

"The risk of potential liability is enormous in this kind of work," says Andrew Kintzinger, a Minneapolis attorney and president-elect of the National Association of Bond Lawyers. "Any law firm engaged in the offer and sale of securities pays significantly more in malpractice insurance premiums."
John Yeoman, a professor of finance at North Georgia College, agrees. The "vast majority" of the fees bond lawyers charge, Yeoman says, go toward protecting themselves against lawsuits that may be filed if an issue goes awry. "They're putting their houses on the line," he adds.

But Clemson's Wayne Marr, a former senior economist with the federal Securities and Exchange Commission, is unmoved by these arguments. "It's easy work," he maintains, "if you can get it."

American cities float bonds all the time to pay for baseball parks, road viaducts, sewers and other large capital improvement projects. The cities hire investment banks to underwrite the bonds; the banks in turn sell the bonds to investors, who are repaid with interest, usually over thirty years. The process makes good sense: Bond debt gives local governments a way to fund projects that would be unaffordable using cash on hand.

But it's very expensive. Every time bonds are floated, cities are required to pay out tens of thousands of dollars in "issuance costs"--the fees and commissions for professionals who put together and manage the deal. Each investment bank involved gets a cut. Financial advisors get hired at top rates. And, of course, there are law firms galore.

DIA has been no exception. When the first $700 million in construction bonds were issued in May 1990, issuance costs ran to $7.4 million, more than 1 percent of the total. A phalanx of fifteen investment banks collected $6.1 million in fees and commissions. Financial advisor Smith Barney Harris & Upham got $300,000. The law firms: almost $950,000.

And though just three types of lawyers are required for each airport issue--"bond counsel," "disclosure counsel" and "underwriters' counsel"-- Denver has almost always divvied up the work further to guarantee that local firms get a piece of the pie. The city's "tag-team" approach pairs large, nationally recognized firms with small but politically connected local ones. Thus Hogan & Hartson of Washington, D.C., with 400 lawyers worldwide, has joined with Denver's miniscule Trimble & Nulan; Chicago's Hopkins & Sutter with Denver's Becker, Stowe, Bowles & Lynch; and Philadelphia's Ballard, Spahr, Andrews & Ingersoll with the 18th Street firm of Bookhardt & O'Toole. All the firms, whose attorneys charge anywhere between $95 and $320 an hour, have been hired under no-bid "professional service" contracts, which don't require approval by the Denver City Council.

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