Municipal bonds have traditionally attracted conservative investors looking for federal tax exempt income. While municipal bonds carry the risk of default, investors rely on rating agencies to grade the issuer’s credit with ratings from AAA to junk bonds. Just like we have credit scores, so do municipalities, and these credit scores let us know what we are getting into. Also, some bonds carry insurance that guarantees repayment of your money if the bond doesn’t.
Bond investors rely on the credit ratings and insurance guarantees in determining the risk when making decisions. But how do you know about fraud risk, as in the case of the Jefferson County mess in Alabama? Jefferson County serves another example of Wall Street’s greed and continued financial shenanigans to make money.
In Jefferson County, JP Morgan & Chase paid $8.2 million to bribe officials so the company could obtain $5 billion in municipal bond offerings and swap agreement transactions. JP Morgan hoodwinked officials into a financing deal that has now resulted in the largest U.S. municipal bond bankruptcy in history. JPMorgan agreed to a $722 million settlement with the Securities and Exchange Commission without admitting or denying any allegations.
Matt Taibbi eloquently summarized this scandal in his Rolling Stone article:
“The destruction of Jefferson County reveals the basic battle plan of these modern barbarians, the way that banks like JP Morgan and Goldman Sachs have systematically set out to pillage towns and cities from Pittsburgh to Athens. These guys aren’t number-crunching whizzes making smart investments; what they do is find suckers in some municipal-finance department, corner them in complex lose-lose deals and flay them alive.” “And even if the regulators manage to catch up with them billions of dollars later, the banks just pay a small fine and move on to the next scam. This isn’t capitalism. It’s nomadic thievery.”
Municipal bond investors looking to avoid being blindsided by another scheme should consider a diversified portfolio using municipal bond Exchange Traded Funds (ETF), a no-load mutual fund who’s manager has at least a 10 year track record, or a separately managed account. For larger portfolios, a separately managed account usually makes more sense because you’ll have a professional institutional bond manager, who should be completely separate from your custodian, buy the bonds in your account, and the portfolio is tailored for your needs.
Sources:
http://www.rollingstone.com/politics/news/looting-main-street-20100331
No Responses to “Municipal Bondholders Blindsided by Greed”