A few years ago, the politicians needed a new headquarters building for their municipal government. The price tag for the building approached $24 million. The politicians felt that the voters were unlikely to approve a bond issue to raise money for the headquarters since approving the bond issue would cause taxes to increase. The politicians opted for a different approach. They had a bank issue $24 million worth of securities to pay for the construction of the building. The municipality then agreed to make a yearly lease payment (comprising repayment of principal and interest) to repay the obligation. Unlike conventional municipal bonds, the lease payments are not binding obligations on the municipal government and, therefore, no voter approval is required.
1. Do you think the actions of the politicians and the investment bankers were ethical in this situation?
2. How does the security issued to pay for the building compare in riskiness to a regular municipal bond issued by a municipal government?