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KinjaWidgetNinjaDigitsAnne Branigin
8/24/18 3:23pm
Historically black colleges and universities (HBCUs) pay higher underwriting fees to issue tax-exempt bonds, compared to similar non-HBCUs. This appears to reflect higher costs of finding willing buyers: the effect is three times larger in the far Deep South, where racial animus remains the most severe. Credit quality plays little role. For example, identical differences are observed between HBCU and non-HBCUs: 1) with AAA ratings, and/or 2) insured by the same company, even before the 2008 Financial Crisis. HBCU-issued bonds are also more expensive to trade in secondary markets, and when they do, sit in dealer inventory longer.
I found the Atlantic’s writeup of the abstract to be a bit obtuse, so I went directly to the abstract and found it a bit more helpful. What the paper appears to be concluding is that investors have biases against buying HBCU bonds that translate into underwriters having to work harder to find willing buyers and also to, importantly, a less active secondary market. The more active and liquid a secondary market for any given type of bond, the lower the interest rate is going to be on it.
To me this is even worse, because if the problem were as simple as “the banks are just being racist” you could, under a reasonable administration, step in and regulate that. You could say “Look at these two issuances. You charged the HBCU more and that’s illegal!”.
But even then, if the underwriting bank that markets the bond to investors says “Well, we had to spend more time and money rounding up other investors to buy the HBCU’s debt issuance, here are the receipts if you would like to see them”, then there’s not really much a regulator could do in that scenario.
Then, on the secondary market side, ECOA and the CCPA (taken together they represent our nation’s fair lending laws) don’t really cover institutional debt issuances.
While this paper may do a good job of proving that secondary markets as a whole are racist, it would be very challenging to prove that any given investor in a secondary market was specifically racist when they purchased another bond instead of an HBCU bond. Finance bros are occasionally dumb enough to put evidence that they are doing shady shit in email, but it’s rarely ever as on the nose as “Well sure, it’s a AAA rated bond, but it’s HBCU AAA, which means that there’s a lot of black people and that’s bad. Let’s buy a bunch of Tesla bonds instead!”
Point being that this is a very pernicious manifestation of racism that I’m not sure even a meaningfully more progressive government could eradicate.
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  msanthropesmr1970KinjaWidgetNinjaDigits
  8/24/18 4:43pm
  You could probably use those Tesla bonds for toilet paper at some point.
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  ToddKinjaWidgetNinjaDigits
  8/26/18 11:32am
  Reading the details, the only way this could be fixed is with a campaign aimed at institutional investors, governments, pensions and the like encouraging them to buy HBCU bonds. It would be a bit arcane, but since the Apartheid divestment campaign worked in the 80s, it would be tractable.
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Not Enough Day DrinkingAnne Branigin
8/24/18 3:59pm
The financial woes affecting HBCU’s—and the effects they are having on their students—have long been documented, and it’s worthwhile to keep those institutions accountable, particularly in cases where funds are being mismanaged.
I took a look at Clark Atlanta’s finances after seeing that article. They’re running a $17.5 million annual surplus (including over $10 million unrestricted surplus which they can spend on anything they want). They’re definitely in the mismanaged category with Howard (which gets more federal money per student than any school I’ve ever seen) and not in the financial woes category.
As to the meat of the article, you don’t mention the Historically Black College and University Capital Financing Program at all, which provides HBCUs with treasury bond rate loans (the Atlantic article touches on it at the end). But for an HBCU to seek outside bond funding means they’ve either been denied the federal loans specifically allocated for HBCUs or they’re delinquent on those loans. Either situation would make the bonds issued by HBCUs less attractive to investors.
It makes it hard to say definitively that it’s racism causing higher bond prices rather than special circumstances (caused ironically in part by a program meant to address racism in financial lending).
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  KinjaWidgetNinjaDigitsNot Enough Day Drinking
  8/24/18 5:56pm
  That’s actually not a terrible theory, but the study’s pretty clear that this is even true for AAA rated issuances by HBCUs.
  Hard to imagine that an HBCU issuing debt that ratings’ agencies will call AAA being denied or having defaulted on a loan from the Capital Financing Program. As bad as they were in 2008, they’ve got their shit together enough now that an existing debt default or loan denial would be reflected in a credit rating of a college.
  There are some limitations on that program that make it so that it might make sense for some HBCUs to go to private market participants.
  Point being that there are times when any sort of default stigma isn’t really a reasonable factor. My own view is that this kind of racism would be hard to stamp out because based on the abstract it reads like the issue is investor demand, not underwriters offering discriminatory pricing “just because”.
  Seeing as these are institutional bonds and not consumer loans, it’s not exactly like you can go wave the ECOA stick at lenders and tell them not to discriminate.
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  Not Enough Day DrinkingKinjaWidgetNinjaDigits
  8/24/18 6:52pm
  I don’t know how bond issuance ratings work, but I don’t think there are any AAA rated HBCUs (even Howard which is essentially backed and funded by Congress is rated BBB). So could investors be looking at the credit rating of the underlying institution or are they only going to look at the insured bond’s rating?
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