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Q

I saw an ad about your site in Sunday’s paper. Just went online to investigate it but was turned off on your story about “good news for the tobacco investor.” You guys completely turned me off with it seems support for the tobacco industry. I can find investments many other places and will skip your site.

A

James A. Klotz responds:

We think you are confused about the nature of tobacco bonds. Here’s a little background that might clarify things for you.

In 1998, an agreement was signed between the four largest tobacco companies and 50 states and territories. The accord, known as the Master Settlement Agreement, requires the original tobacco companies, plus 36 companies that signed afterward, to pay approximately $206 billion over 25 years to the states as repayment for health costs borne by the states from smoking-related illnesses. The states, in return, agreed not to sue tobacco companies who are part of the agreement.

Many states – including New York – sought immediate access to their portion of the settlement funds and chose to securitize them using the tax-free bond market. Incidentally, New York has issued more than $2.5 billion of these bonds.

These bonds have proved to be popular among investors. In fact, the states combined have issued approximately $20 billion of these securities, the majority of which are owned by individual investors.

As a municipal bond dealer, our job is to provide important information to municipal bond holders regarding the status of their investments. That’s what we’re doing when we report on news that might affect the bonds. (Judging by the volume of correspondence we receive, many investors appreciate it.)

Our news is not directed to people who own stock in tobacco companies, as your e-mail suggests, but to holders of the tobacco settlement bonds issued by states.

Tobacco bonds are the result of tobacco makers being punished, not rewarded. An investment in tobacco bonds does not support the tobacco industry. It simply ensures that states get their money sooner rather than later. (As it turns out, many states now depend on funds from the tobacco settlement.)

In regard to your comment about seeking investments elsewhere: We hope you choose to do business with us, but if not, it may be impossible to find a firm that doesn’t sell or report on tobacco bonds (or, for that matter, firms that don’t sell or report on the stock of tobacco companies).

For more on tobacco bonds, visit our Commentary and Analysts’ Insight pages or scroll down on this page.