Planet Money Indicator: NPR



This is THE PLANET MONEY INDICATOR. I am Darian Woods.


And I’m Wailin Wong. And I hope everyone packed their galoshes today because we have to wade through the culture wars.

WOODS: Oh yeah, it’s thick and deep, this quagmire. But don’t worry, there’s an economic lesson here.

WONG: And we’ll find him. Now, there has been a lot of public rhetoric from government officials attacking companies over their ESG policies. ESG stands for environment, social and governance, and it’s a broad term to describe business decisions around things like climate change and diversity in the workplace.

WOODS: And some states have gone beyond anti-ESG rhetoric. Last year, Texas banned local governments from working with certain banks. These were banks that the heads of state said discriminated against things like oil, gas and guns. Here’s how one state legislator, Republican Phil King, put it.

PHIL KING: If you boycott Texas Energy, then Texas will boycott you.

WOODS: You can’t fire me. I stop.

WONG: I’ll break up with you first.

WOODS: I have that kind of vibe.

WONG: Now, when these laws went into effect, five major banks stopped working with local governments on municipal bond transactions. And this turn of events caught the attention of economist Dan Garrett, who studies the municipal bond market.

DAN GARRETT: The question running through my mind was what happens when a bunch of banks all leave at once?

WOODS: On today’s show, we’ll follow Dan’s efforts to quantify the cost of these anti-ESG regulations in Texas. And we’re looking at what that might mean for other states considering similar moves.

WONG: I put on my safety glasses. Umbrellas up.

WOODS: As we wade in, we’ll find impassioned rhetoric.

WONG: And math.

WOODS: Lots of strong opinions.

WONG: And statistical analysis.

WOODS: And that’s all you need.

WONG: Dan Garrett is great at municipal bonds. And he admits that in his professional circles, there aren’t many people who share his passion. Not even at the University of Pennsylvania, where he is an assistant professor at the Wharton School.

GARRETT: Every time someone listens to me talk about muni-bonds, I get really excited. Bonds are often what we consider to be tailor-made. It’s a really interesting market.

WOODS: Yeah, like bespoke like in, you know, handcrafted single-origin municipal bonds.

WONG: They are very artisanal. They are so chic. Yeah. Thus, muni-bonds are highly customized for local projects, such as building a new gymnasium for a public high school or spraying chemicals to kill mosquitoes. Glamour. Very glamorous.

WOOD: That’s true.

GARRETT: Bonds pay for everything in the United States. They pay for water treatment. They pay for the schools. They pay for sidewalks, public lighting.

WONG: And when local governments issue bonds, they hire banks to underwrite those deals. Let’s say a school district raises $10 million for a new gymnasium. The bank writes the school district a check for $10 million. Then the bank opens its huge Rolodex and starts making trade calls. It sells those $10 million in muni bonds to pension funds and other investors.

WOODS: In Texas, local governments issue about $50 billion in municipal bonds a year. It’s a huge market. And now, with the state’s new anti-ESG laws, banks are prohibited from entering into these transactions if, in their other transactions, they had divested from the oil and gas sector or had restricted their activities with gun companies. This is something several banks have done in response to the mass shootings.

WONG: Earlier this year, Dan Garrett was chatting with fellow muni-bond enthusiast, Ivan Ivanov, when the anti-ESG laws in Texas came to light.

GARRETT: We started talking and Ivan was like, hey, have you seen that Texas thing?

WONG: This thing in Texas wasn’t just the laws themselves, but what happened after the laws went into effect. Five major banks abruptly left the Texas muni-bond market.

IVAN IVANOV: We basically thought it was a really cool economic shock.

WOODS: A really cool economic shock. Did you hear that?

WONG: Ivan is an economist at the Federal Reserve Bank of Chicago. And oh, we should say he was quick to say in our conversation…

IVANOV: That’s my point of view. They are not those of the Fed or the Board of Directors or the Federal Reserve Bank of Chicago.

WOODS: Ivan points out that the departure of these banks was an economic shock because they were responsible for underwriting about one in three muni-bond transactions in Texas.

WONG: And those were household names too – Citigroup, JP Morgan Chase, Goldman Sachs, Bank of America and Fidelity Capital Markets. Ivan says the rapid departure of so many big players is a rare event in the banking industry. It left a big hole in the market, and it gave him and Dan that natural experience on a silver platter.

IVANOV: These laws came very quickly, which for us is very good because the shock is very clean.

WOODS: Dan and Ivan collected data on municipal bonds issued in Texas during the first eight months of these anti-ESG laws. And they looked at how much it cost local governments to borrow that money, basically what they were paying in interest.

WONG: The amount a government pays in interest is set in different ways. Sometimes the government chooses a bank and the two parties negotiate the terms of the bond.

WOODS: And other times the borrower, in this case the government, holds an auction. Different banks submit bids, and the one that offers the best terms becomes the underwriter of the bond. In any case, the final interest rate reflects both the creditworthiness of the borrower and a certain profit for the bank.

WONG: Dan and Ivan worked out the numbers for eight months of muni-bond deals. And they found that borrowing costs increased when these five banks exited the market. They estimate that borrowers in Texas will end up paying $300 million to $500 million in additional interest.

WOODS: There are several reasons why interest rates may have risen. One is that the big banks have these vast networks of customers who buy muni bonds. Local governments have therefore lost access to these large pools of demand and this has driven up tariffs.

WONG: Another reason could be that with fewer banks in the market, the remaining banks had less competition and therefore more leeway to charge higher rates.

WOODS: Dan and Ivan wanted to make sure there were no other reasons for the higher interest rates, so they created control groups. They looked at borrowers in Texas who worked with banks that stayed in the market. They looked at borrowers from other states who worked with the five banks that left Texas. And things got pretty economical.

GARRETT: We do what we call a triple difference analysis. Thus, instead of a difference in differences, it is a difference in difference in differences.

WOODS: I like a good difference in difference in differences.

WONG: Can you say it three times quickly?

WOOD: Yeah. And then a ghost of John Maynard Keynes will appear, however.

WONG: Oh, no (laughs). Well, we’ll leave the statistical analysis and ghost hunting to Dan and Ivan. Suffice to say that they concluded that the departure of these banks led to a sharp increase in borrowing costs for issuers, local governments.

GARRETT: Those issuers who in Texas worked with those specific underwriters experienced higher borrowing costs than other issuers in Texas who look similar, or outside of Texas who look similar , did not know. Something happened to those Texas-specific transmitters starting September 1.

WOODS: Something happened. Something happened. But what?

WONG: The ghost of John Maynard Keynes?

WOOD: Yeah. Either that or maybe it was the anti-ESG laws that went into effect that day. Dan and Ivan say what happened with borrowing costs in Texas when they got up, it might have a elsewhere too. Anti-ESG laws have popped up in states like Oklahoma and West Virginia.

IVANOV: There are, like, 14 other states that have worked on laws that go along the same lines. It would therefore be interesting to see the impact of these other laws on the markets of these States.

WONG: At the same time, banks are increasingly adopting ESG-related policies. And Dan says this conflict over ESG policies begs the question, who needs who more? Do governments need banks in the market to keep borrowing costs low? Or do banks need the underwriting business they get from states like Texas?

WOODS: And in Texas, it looks like the banks want to come back. A few banks that had left are finding ways to re-enter the market.

WONG: And if business resumes as normal, the spike in borrowing costs might just be a temporary accident. Either way, Dan is excited to see what happens.

GARRETT: It’s a fun day for muni-jumping, and I wish we had all the answers for you. This is the nature of research. That’s what makes it fun.


WONG: Keep your goggles on.

WOODS: I’ll keep my clogs. I call them rubber boots, though.

WONG: What?

WOODS: Not to be confused with detectives.

WONG: That’s what Dan and Ivan do. They solve economic mysteries.

WOOD: Exactly.

WONG: By the way, Fidelity, Goldman Sachs and Bank of America are financial backers of NPR. This episode was produced by Niki Willette (ph) with engineering from Maggie Luther. Senior producer Viet Le also checked the facts. Kate Concannon edits the show. And THE INDICATOR is an NPR production.

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Melissa C. Keyes