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Q

Am I missing something? By purchasing a bond as an individual investor, you say that I am helping the states, not the tobacco industry. Wouldn’t it be more accurate to state that I am helping the investment banks, who bought the stream-of-payments from the states, so that those banks spread their risk of loss to individuals like me? If no individual bought a bond, wouldn’t the investment banks a) get all the income, but also b) incur all the risk of default?

A

James A. Klotz responds:

The Master Settlement Agreement was negotiated in 1998 by the states and the major tobacco companies. Payment terms were established at that time and these payments are not affected by the issuance of bonds.

In order to finance current projects, some of the states chose to securitize their payments from the tobacco companies. If there was no market for these securities (investors), the bonds would not have been issued at all. Underwriters would not hold the debt themselves.

As it turns out, the real winners are the investors. They received and continue to receive better-than-market current returns along with substantial capital gains (particularly those who held bonds that were refinanced).