by FRANK KEEGAN | August 2, 2012
The word “taxpayer” appears only 14 times in 165 pages of the Securities and Exchange Commission’s Report on the Municipal Securities Market released Tuesday. Only two of those mentions in the body of the report refer to looking out for our interests.
In her statement introducing the report, SEC Chairman Mary L. Schapiro made it clear bond buyers are primary beneficiaries of the recommendations: “While we have put in place measures to help investors make more knowledgeable decisions about municipal securities, we could do more for investors with statutory authority to improve disclosure and muni market practices.”
She initiated the study and hearings around the country two years ago after egregious scams revealed systemic and pervasive failure of current regulations and standards for municipal bonds and related derivatives.
According to SEC about 75 percent of the estimated $3.7 trillion in municipal bonds is owned by individuals, 50 percent directly and another 25 percent through mutual and money market funds. The rest are held by institutional investors.
According to Schapiro’s study, “The mission of the SEC is to protect investors – including investors in municipal securities – maintain fair, orderly, and efficient markets, and facilitate capital formation.”
The mission of the SEC does not explicitly include protecting taxpayers from unscrupulous politicians, bureaucrats, bond dealers, financial advisors, consultants or any other of the predators who have turned a solid house of prudent public finance into a den of thieves.
From the mass of regulatory and legislative reforms proposed in this report, it looks as if that house is so rotten at the foundation it could fall any time.
Bottom line is that right now, there is no way to tell which among more than a million municipal bond issues by 44,000 issuers – among 87,000 government “entities” — is any good.
That is because, among other problems: “…disclosure of audited annual financial statements … is particularly slow. …There are no uniformly applied accounting standards …. conduit borrowers provided substantially less continuing information than issuers …. The accuracy and adequacy of disclosure regarding pension and OPEB [Other Post Employment Benefits] funding obligations …. Exposure to Derivatives …. Disclaimers of Responsibility …. undisclosed payments, political contributions, and bid rigging….”
Complicating this bond ruin beneath a façade of safety are chilling acknowledgments of abuses such as “negotiated offerings” that “create opportunities for municipalities to allocate underwriting business on the basis of political contributions rather than on the price and quality of underwriting services.”
Those “conduit” entities and “derivatives” secretly put taxpayers on the hook for billions and let politicians slip around legal borrowing limits.
The “… conduit bonds have represented approximately 70% of all municipal bond defaults despite representing a relatively small percentage of municipal bonds issued,” according to the report.
As for derivatives, “The special and significant risks posed by derivative instruments to municipal issuers has underscored the need to consider enhanced disclosure ….”
Considering just one common type of derivative, the report said, “there currently is no comprehensive data on how many municipal issuers are active in the $162 trillion U.S. dollar-denominated interest rate swap market, although anecdotal evidence suggests a relatively wide use.”
That is $162 TRILLION, in notional value, putting taxpayers at risk for incalculable billions in losses.
Anyone who believes current regulation is enough to protect taxpayers from these deals, take a look at the State Attorneys General Muni Bond Derivatives Settlement Website. Those are just the ones who got caught, so far.
However the most tragic scam acknowledged by this report is politicians looting of municipal and state worker retirement funds to bypass legal debt restrictions. Public pension funds are at least $4.6 trillion short as of 2011, and falling fast.
“Obligations to provide pension and OPEBs can significantly affect a municipal issuer’s financial health and may impact its ability to make debt service payments on municipal securities,” the report states, confirming numerous recent studies proving that fact.
Right now, according to state constitutions, statutes and case law, public pensioners generally are first in line when it comes to taking taxpayer money. That puts them ahead of municipal bondholders, who invested under the delusion they get paid first.
Just the need for this report reveals that this prudent fiscal instrument of safe investment for the greater public good through building of schools, roads, bridges, utilities and other good and essential structures of government has been turned into an insidious machine to enrich a few at the expense of the many.
Beyond the merits of any specific recommendations for new laws and regulations is the overwhelming fact that, taken as a whole, it indicts the entire system.
Whether this system fundamentally is corrupt beyond reformation remains one assumption SEC leaves unquestioned in this report.
Another is whether docile taxpayers and dedicated public workers will go along with the massive tax hikes and crippling service cuts required to pay for the follies of politicians and their cronies.
Schapiro must recast the SEC mission within context of history and realize she cannot consider those assumptions immutable.
If SEC refuses to put taxpayers first among those it must protect, ultimately investors, financiers, politicians and public workers will lose.
In America, citizens can demolish any house turned into a den of thieves and rebuild.
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