Best of the Week
Most Popular
1.U.S. Inner City Turmoil and Other Crises: Ron Pauls Predictions for 2015 - Dr_Ron_Paul
2. What’s In Store For Gold Price in 2015? - Ben Kramer-Miller
3.Crude Oil Price Ten Year Forecast to 2025: Importers Set to Receive a $600 Billion Refund - Andrew_Butter
4.Je ne suis pas Charlie - I am not Charlie - Nadeem_Walayat
5.The New Normal for Oil? - Marin_Katusa
6.Will Collapse in Oil Price Cause a Stock Market Crash? - OilPrice.com
7.UK CPI Inflation Smoke and Mirrors Deflation Warning, Inflation Mega-trend is Exponential - Nadeem_Walayat
8.Winter Storms Snow and Wind Tree Damage Dangers, DIY Pruning - Nadeem_Walayat
9.Oil Price Crash and SNP Independent Scotland Economic Collapse Bankruptcy - Nadeem_Walayat
10.U.S. Housing Market Bubble 2.0 Meet the Pin - James_Quinn
Last 5 days
Silver and Other Precious Metals To Manipulate - 30th Jan 15
Socialism Is Like a Nude Beach - Sounds Like a Great Idea Until You Get There - 30th Jan 15
To Create Unlimited Market Liquidity or Not; That Is the Question - 30th Jan 15
Seen the Energy Downturn Movie Before, and Not Worried - 30th Jan 15
It’s Not Time to Sell Everything – Yet - 30th Jan 15
13 Investment Themes for 2015 - 29th Jan 15
The Raging Currency Wars Across Europe - 29th Jan 15
The End of Currency 'Safe-Havens' - 29th Jan 15
Ron Paul on U.S. Fed, Central Bankers Monetary Psychopaths - 29th Jan 15
Why Microsoft Stock Will Provide Major Investing Returns - 29th Jan 15
Exploring the Clash Within Civilizations - Mind the Gap - 29th Jan 15
Saudi Arabia Changes Kings, But Not its Oil Policy - 29th Jan 15
Crude Oil Price Bulls vs. Resistance Zone - 28th Jan 15
Acceleration Of Events With Rising Chaos – US Dollar Death Foretold - 28th Jan 15
The Fed and ECB Take the West back to when the Rich Owned Everything - 28th Jan 15
Washington's War on Russia - 28th Jan 15
Cyber War Poses Risks To Banks and Deposits - 28th Jan 15
Lies And Deception In Ukraine's Energy Sector - 28th Jan 15
EUR, AUD, GBP USD – Invalidation of Breakdown - 28th Jan 15
“Backup-Camera Envy” Is Driving This Unstoppaple Investment Trend - 28th Jan 15
The Great "inflated" Expectations for Gold, Oil, Commodities -- and Now Stocks - 28th Jan 15
How to Find the Best Offshore Banks - 28th Jan 15
There’s More to the Gold Price Rally Than European Market Fears - 28th Jan 15
Bitcoin Price Tense Days Ahead - 27th Jan 15
The Most Overlooked “Buy” Signal in the Stock Market - 27th Jan 15
Gold's Time Has Come - 27th Jan 15
France America And Religious Terror War - 27th Jan 15
The New Drivers of Europe's Geopolitics - 27th Jan 15
Gold And Silver - Around The FX World In Charts - 27th Jan 15
It’s Not The Greeks Who Failed, It’s The EU - 27th Jan 15
Gold and Silver Stocks Investing Basics - 27th Jan 15
Stock Market Test of Strength - 26th Jan 15
Is the Gold Price Rally Over? - 26th Jan 15
ECB QE Action - Canary’s Alive & Well - 26th Jan 15
Possible Stock Market Pop-n-drop in Store For SPX - 26th Jan 15
Risk of New Debt Crisis After Syriza Victory In Greece - 26th Jan 15
How Eurozone QE Works: A Guide to Draghi's News - 26th Jan 15
Comprehensive Silver Price Chart Analysis - 26th Jan 15
Stock Market More Retracement Expected - 26th Jan 15
Decoding the Gold COTs: Myth vs Reality - 26th Jan 15
Greece Votes for Syriza Hyperinflation - Threatening Euro-zone Collapse or Perpetual Free Lunch - 26th Jan 15
Draghi's "No-growth" QE Money for Stocks, Zilch for the Economy - 25th Jan 15
Unjust and Undeclared Wars - 25th Jan 15
The European Central Bank Commits Monetary Suicide - 25th Jan 15
Stock Market ECB EQE week - 25th Jan 15
Gold And Silver Timing Is Most Important Element - 25th Jan 15
The Best Way to Invest in the Next Alibaba Internet Stock IPO - 25th Jan 15
The Outpatient Surgery Business Rains Cash into Healthcare Stocks - 25th Jan 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Learn to Trade

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