Best of the Week
Most Popular
1.Stock Market in DANGER of Strangling the Bears to Death - Nadeem_Walayat
2. Germany Pivoting East, Exit US Dollar, Enter Gold Standard - Jim_Willie_CB
3.Flight MH17 – Kiev Flash Mob's Last False Flag? - Andrew_McKillop
4.Stock Market Crash Nightmare! - Nadeem_Walayat
5.Gold - The Million DOLLAR Question... - Rambus_Chartology
6.Gold And Silver – BRICS And Germany Will Pave The Way - Michael_Noonan
7.The Jewish Selfish Gene, People Chosen by God, Everyone Else is Goyim to Kill - Nadeem_Walayat
8.The Israeli Promised Land Dream - The Criminal Roadmap Towards “Greater Israel”? - Felicity Arbuthnot
9.Which Way is Inflation Blowing? Watch Commodities - Gary_Dorsch
10.U.S. Economy Quarterly Review and Implications for 2014-2015 - Lacy Hunt
Last 5 days
What It Means - Paradigm Collapse And Culture Crisis - 27th July 14
Wall Street Shadow Banking: You Can’t Taper a Ponzi Scheme: “Time to Reboot” - 27th July 14
6 Tips for Picking Winning Gold Mining Stocks - 27th July 14
Israel's War on Children, Exterminating the Palestinians Future - 27th July 14
Guilt By Insinuation - How American Propaganda Works - 26th July 14
Surprise Nuclear Attack On Russia To Liberate Ukraine - 26th July 14
Use "Magic" Of Gold/Silver Ratio To Greatly Increase Your Physical Holdings - 26th July 14
Derivatives Market Species Origins - Abuse, Props and Risks - 26th July 14
Stock Market Manipulation and Technical Analysis - 26th July 14
China’s Stock Market Finally Looks Like A Buy - 26th July 14
Ed Milliband Fears Israel Jewish Fundamentalist Gaza War Massacres Backlash - 26th July 14
The Big Energy = Power Battle Is Coming - 25th July 14
USrael - Zionists in Control of America's Goyim Brainwashed Second Coming Slaves - 25th July 14
More Weakness Ahead for Gold Miners - 25th July 14
Gold Price Strong Season Starts - 25th July 14
Geopolitics and Markets Red Flags Raised by the Fed and the BIS on Risk-taking - 25th July 14
Gold Lockdown Until Options Expiry - New Singapore Gold Contract Threatens Price Manipulation - 25th July 14
The Bond Markets, Black Swans, and the Tiny Spirit of Santo - 25th July 14
No Road Map For Avoiding The Future - 25th July 14
Israeli War Machine Concentrating Women and Children into UN Schools Before Killing Them - C4News - 25th July 14
Israeli Government Paying Jewish Fundamentalist Students to Post Facebook Gaza War Propaganda - 25th July 14
Why the Stock Market Is Heading For A Fall - This Time Is Not Different - 25th July 14
An Economic “Nuclear Strike” on Moscow, A “War of Degrees” - 25th July 14
BBC, Western Media Working for Israeli Agenda of Perpetual War to Steal Arab Land - 25th July 14
Ukraine: What To Do When Economic Growth Is Gone - 24th July 14
Stock Market Clear and Present Danger Zone - 24th July 14
The Five Elements to Creating a Something-for-Nothing Society - 24th July 14
Instability is the New Normal? - 24th July 14
Israel's Suicide Bombers Over Gaza - 24th July 14
EUR-AUD Heads Into The Danger Zone - 24th July 14
Tesco Supermarket Death Spiral Accelerates as Customers HATE the Mega Brand - 24th July 14
Ukraine MH17 Crisis - Best Remember Who Your Friends Are - 24th July 14
Three Reasons Why Gold Price and Gold Stocks Will Rise - 24th July 14
HUI Gold Bugs Fighting To Break Downtrend - 23rd July 14
What Putin Knows About Flight MH17 - 23rd July 14
Why Microsoft Will Continue to Rebound, Huge Upside Potential - 23rd July 14
Will Putin Survive? - 23rd July 14
MH17 Crash Next Phase Economic Warfare - 22nd July 14
The TRUTH about China’s Massive Gold Hoard - 22nd July 14
Forex Multi-week Consolidation in EUR/USD Ended - 22nd July 14
Bitcoin Price Medium-term Trend Being Tested - 22nd July 14
Beware Of The Flash Mob - 22nd July 14
Can Putin Survive? - 22nd July 14
Israel Assault on Gaza: A Historic Crime, Nazi Like Final Solution - 22nd July 14
Zionist Israel an International Pariah - 22nd July 14
Reflections on the Global Misery Index - 22nd July 14
GDP Economic Statistic : A Brief But Affectionate History - 22nd July 14
TransTech Digest: Super Battery Bio-Power vs. Dirty CleanTech - 21st July 14
How to Find Trading Opportunities in the Currency Markets - 21st July 14
Stock Market One More Pull Back - 21st July 14
The Conquest Of Real - Degenerate Philosophies of the Book - 21st July 14
A Clear Way to Profit from a Graying Population - 21st July 14
Last Chance Critical Financial Market Forecasts Special Total Access - 21st July 14
Stock Market Crash Nightmare! - 21st July 14
Why the Stock Market Is STILL Cheap - 21st July 14
From Gore-Bore To Gore-War - 21st July 14
Gold Price Looking Drab - 21st July 14
An In-Depth Look at Gold Chartology - 21st July 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Fed Impact on Stock Market Trend

Miami's Municipal Woes (Again): Exiting Before the Tide Goes Out

Politics / US Debt Feb 20, 2010 - 06:30 AM GMT

By: Fred_Sheehan

Politics

Miami's tradition of unruly official behavior is finally bringing painful consequences. After years of reckless financial management and a bribery scandal that produced federal charges against three top city officials, South Florida's largest city stands on the edge of bankruptcy."-Time, December 16, 1996, "Gloom Over Miami"


The odor from low tides is often strongest near mud flats. Credit bubbles are similarly disposed. During the high tide of the telecom boom, Global Crossing and WorldCom borrowed with abandon. When revenues did not rise to cover borrowing costs, their lamentable accounting practices smelled like a clam digger's paradise.

The municipal borrowing boom of the past decade is no different. States and municipalities borrowed $137 billion in 2003 and $215 billion in 2007. This scramble in itself was enough to cause concern. These were flush times. Tax receipts by states and local governments rose from $975 billion in 2003 to $1,304 trillion in 2007. (See The Coming Collapse of the Municipal Bond Market in the Articles section of the Aucontrarian.com website for details.) Municipalities were borrowing at record levels when taxes were producing a flood tide of revenues.

This indicates mismanagement on a broad scale. The municipal bond holder might look at the telecommunications boom for similarities. The great telecom scramble in the 1990s ended after the millennium in a bad stench of bankruptcy, fraud, prison terms and the demise of one accounting firm (Arthur Anderson) that abetted these scandals.

Gary Winnick founded Global Crossing in 1997. He had no technology background. Winnick watched a video to learn how to lay cable. He was a good enough salesman (having developed his techniques with Michael Milken at the latter's famous x-shaped trading desk at Drexel, Burnham, Lambert) to raise billions of dollars. He intended to build 71,000 miles of undersea, high-speed, fiber-optic cable, linking 159 cities in 19 countries and able to reach 85% of the world's telecom market. According to Forbes magazine, Winnick made a billion dollars - for himself - in 18 months. Global Crossing filed for bankruptcy in 2002.

Bernie Ebbers was chosen as WorldCom's CEO in 1985. The company was called Long Distance Discount Services, Inc. (LDDS), with headquarters in Hattiesburg, Mississippi. Ebbers was not much of a technology whiz either. At his trial in 2005, Ebbers told the courtroom: "I don't know technology and engineering. I don't know accounting."

Ebbers spent money faster than he could raise it (a trait of soon-to-be-busted municipalities). An abbreviated list of the WorldCom family is a short tour through the 1990s. It bought Advanced Communications Corp. (1992), Metromedia Communication Corporation (1993), IDB Communications Group, Inc (1994), Williams Technology Group, Inc. (1995), MFS Communications Company (1996), UUNet Technologies, Inc., (1996), CompuServe (1997), and then the largest combination in U.S. corporate history ($37 billion) when it merged with MCI in 1997. It became the United States' second biggest long distance telephone company (after AT&T).

WorldCom filed for bankruptcy in 2002. It is probably of little solace to investors that Ebbers is serving a 25-year jail term. Arthur Anderson, its accounting firm, a pillar of American corporate respectability, dismissed its 28,000 employees in 2002 as revelations of accounting fraud at WorldCom, Global Crossing, and Enron ruined the century-old company's credibility.

The high tide of municipal finance is retreating. Occasional whiffs of the mud flats are drifting ashore. The Securities and Exchange Corporation (SEC) is probing the City of Miami's "major bond offerings between 2006 and 2009 and questionable financial transfers to balance the budget."

Continuing with the Miami Herald's summary, the hometown newspaper reminded readers of its own investigation in July 2009 that unearthed "the root causes of an emerging financial meltdown [that] focused on a series of questionable money transfers from capital-project accounts to the general fund."

Many bond investors rely upon rating agency evaluations. Given the agencies' recent follies, there is already a degree of risk linked to this approach. (Many fund managers who bought WorldCom stock relied on the rating agencies and on Wall Street "buy" recommendations.) The Miami Herald ratchets up the risk profile: "[T]he SEC is exploring whether the city misrepresented its true financial condition when [the agencies examined the city's books before the city] went to market to float bonds for major projects."

The regrettable behavior has its precedents. In 1996, Miami suffered a fiscal crisis when the city "tried to hide a $68 million shortfall by shifting money between hundreds of capital accounts." In January 2010, "Miami leaders are already projecting a $45 million budget shortfall this year that could force the city to deplete its reserves and sell key assets to stay afloat." (Miami Herald, January 31, 2010)

This shell game seems to be in the municipal handbook. In When America Aged, Roger Lowenstein described the City of San Diego's accounting manipulations in the mid-1990s. They were orchestrated by city manager Jack McCrery: "He moved expenses around, shifted personnel, offset one account against another. A favorite McCrery tactic was to charge the water or sewer departments for laying pipes under city streets, which effectively transferred costs from the general fund to water and sewer (which had the power to assess fees). [City of San Diego] council members complained they didn't understand his machinations, that he never explained the budget... but the truth was they were happier not knowing what McCrery was up to."

This happy ignorance is by no means a preserve of municipal fiduciaries. The Ebbers' defense ("I don't know accounting") will be a common excuse when state and city finances unravel. Recently, the star-studded and highly compensated Citigroup board was not familiar with SIVs or CDOs when it mattered, and sat by as Citi's stock fell over 95% between 2007 and 2009.

If all goes well, municipal bond holders receive 4% non-taxable interest payments. It might be worth foregoing this coupon income until the tide starts to rise again. Zero percent (in Bernanke-starved money market funds) is better than a 20% loss.

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

© 2010 Copyright Frederick Sheehan - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014