MuniLand

Should the SEC hire bounty-hunters?

The majority of pundits and market observers have only tuned into the effectiveness of the SEC as financial market regulator since 2008, when the financial system nearly collapsed. So far, criticism has been relatively shallow. But when one of the most influential securities attorneys in America, Columbia University’s John Coffee, weighs in on the effectiveness of the SEC’s enforcement actions, we should all take note. Coffee’s SEC biography gives some background on his preeminence:

According to a recent survey of law review citations, Professor Coffee is the most cited law professor in law reviews in the combined corporate, commercial, and business law field.

And what does Professor Coffee have to say about the efforts of the SEC to prosecute financial market lawbreakers? He wrote on the CLS Blue Sky Blog:

A disturbingly persistent pattern has emerged in U.S. Securities and Exchange Commission enforcement cases that involves three key elements: (1) The commission rarely sues individual defendants at large financial institutions, settling instead with the entity only; (2) when it does sue individual defendants, it frequently loses; and (3) the penalties collected by the commission from corporate defendants are declining and, in any event, are modest in proportion to the profits obtained.

Coffee’s first and second observations are the ones that commentators most often focus on. Why haven’t any bankers, who caused the global financial system to collapse, gone to jail? Coffee contrasts the SEC’s approach with another financial overseer, the FHFA, which has been indicting individuals:

Is New Jersey fiscally imploding?

The governor of New Jersey, Chris Christie, held a press conference on Wednesday in which he excoriated the U.S. Speaker of the House, John Boehner, and other Republicans for failing to hold a vote on Sandy relief this week. With a tone that is rarely heard in national politics, Christie accused the Congressional leadership of his own party of “duplicity” and “selfishness,” according to The New York Times. Meanwhile, New York governor Andrew Cuomo and New York City Mayor Michael Bloomberg delivered more tempered comments.

Was Christie’s tirade just common speech for Jersey, or are there other pressures on the governor? New Jersey state revenues are far from the projections that Christie’s administration made. Many, including myself and rating agencies, have said Christie’s revenue projections for fiscal year 2013 were overly optimistic given the economic climate. Meanwhile, Christie barnstormed around the state on his “New Jersey Comeback” tour for months until it was clear that the state was not experiencing a jobs boom. State revenues were already weak. Then Sandy flattened many tax and fee streams.

Here is New Jersey’s year to date report (July 1, 2012 – November 30, 2012) from the state treasurer (in $1000’s):

Federal budget fantasies

Regardless of the outcome of the negotiations between President Obama and Congress, the government’s budget is seriously out of balance. Here is a fiscal picture for the federal government from February in a simple form:

* U.S. Tax revenue: $2,170,000,000,000

* Fed budget: $3,820,000,000,000

* New debt: $1,650,000,000,000

* National debt: $14,271,000,000,000

* Recent budget cuts: $38,500,000,000

Let’s remove eight zeros from these figures and pretend it’s a household budget:

* Annual family income: $21,700

* Money the family spent: $38,200

* New debt on the credit card: $16,500

* Outstanding balance on the credit card: $142,710

* Total budget cuts so far: $38.50

The only brake on the spending of the federal government is the debt ceiling. Congress has been willing over and over to raise the limit on the amount of debt issued by the U.S. Treasury. This debt is transferred to the Federal Reserve, which sells it to financial markets, but it has been buying it back as part of its quantitative easing program. Unless Congress finds some fiscal discipline, this process will likely continue for decades, or until some external shock or technology development drives real productivity and growth.

Why the Federal Reserve should buy national infrastructure bonds

The Federal Reserve is in the middle of a third round of bond buying that is commonly called quantitative easing (or QE3). The goal is to suppress interest rates, and it was the main monetary policy tool that the Fed began using in December 2008 to support the financial system during the credit crisis. The financial system has returned to racking up record-breaking profits, and the Fed has shifted the purpose of QE to propping up the housing system and the general economy.

By some measures though, the housing market may be showing bubble-like properties again from the broad efforts of the Fed. Rather than potentially fueling a new bubble, the Fed should turn to buying infrastructure bonds to rebuild America’s energy grid, bridges, roads, rail systems and ports. This would be a direct investment in the public sector of the nation, rather than the personal assets of households. If the Fed invested in America’s hard assets, it would create jobs and put in place the necessary framework to truly spur economic expansion.

The efforts of the Fed to prop up the housing market may be entering bubble territory in select markets (see Phoenix) as housing values rise more quickly than household incomes. From the blog Dr. Housing Bubble (emphasis mine):

Higher online sales mean less state tax revenues

States on average derive about 49 percent of their revenue from sales taxes, so holiday shopping results are important for state treasuries. Unfortunately, the early read on holiday retail sales looks pretty bleak. Reuters reports (emphasis mine):

As the U.S. holiday season winds down, retailers are left to hope that post-Christmas sales can help salvage their worst performance since 2008, preliminary data showed.

Holiday-related sales rose 0.7 percent from October 28 through December 24, compared with a 2 percent increase last year, according to data from MasterCard Advisors SpendingPulse.

The epic Senate battle over relief funding for Sandy


New Jersey Governor Chris Christie recently berated Congress for its lack of progress on funding recovery monies for Hurricane Sandy. He made the argument that New Jersey and New York are net contributors to the federal treasury and they therefore deserve the funds that they requested. Yet, it is members of Christie’s own party who are slow-walking the legislation that would authorize spending. Republicans have raised some concerns – among them the amount of the original request and the need to budget for it.

The Republicans are right. More study should be performed into how states and communities are reimbursed for hurricane damage. Senator Charles Schumer of New York and others who are pushing for the funding cite the speed and largess of the federal government toward the affected Gulf region after Hurricane Katrina. But a study conducted by the Federal Reserve Bank of New York determined that the economic costs of Katrina were over-compensated to a level of 125%:

In hurricanes prior to Katrina, the [federal government reimbursement] rate was generally between 75 and 90 percent. However, beginning with Katrina, state and local governments often received 100 percent reimbursement. With this expansion of federal disaster assistance, payments from private insurance companies and the federal government exceeded the total economic cost of events since Katrina by about 25 percent.

Time to ban UBS from doing business in the U.S.

Times have changed since 1989. That year, bond king Mike Milken was indicted on 98 counts of racketeering and securities fraud. He served two years in prison after he pled guilty to six securities violations. Milken paid $1.1 billion in fines and disgorgement to investors. His firm, Drexel Burnham Lambert, settled civil and criminal charges, but it went bankrupt the following year.

Now, because of the fragility of the financial system, UBS, the latest firm to be involved in systemic financial crimes after it was found to be manipulating Libor, will only face a criminal charge against its Japanese subsidiary. It is the equivalent of a legal slap on the wrist. The bank should instead be banned from conducting business in the U.S. The WSJ reports:

Regulators described the alleged illegality as ‘epic in scale,’ with dozens of traders and managers in a UBS-led ring of banks and brokers conspiring to skew interest rates to make money on trades. The six-year effort ‘seriously compromised’ the integrity of financial markets, said the U.S. Commodity Futures Trading Commission[…]

The SEC rounds up muniland’s bad guys

The SEC – the top law enforcer for muniland – has been riding the range. With 17 municipal securities enforcement actions in 2012, the SEC cops have come up with a nice collection of scalps.

The Bond Buyer held a webinar Wednesday on municipal disclosure with John Cross, who heads the SEC’s Office of Municipal Securities, Jay Goldstone, who heads the Municipal Securities Rulemaking Board and various municipal attorneys. It was an excellent summary of muniland disclosure laws, but what I found most interesting was John Cross’ discussion of the top SEC enforcement actions in muniland for 2012. Rounding up the bad guys. Here are the top four enforcement actions according to Cross:

1) The General Electric and Wells Fargo bid-rigging cases: In the case of General Electric, the U.S. Justice Department prosecuted criminal charges. Reuters reports:

The real action on Rhode Island pensions has begun

 

Although the national media has always been a fan of Rhode Island State Treasurer Gina Raimondo, I’ve personally been lukewarm on her performance. She built a case for draconian changes in pension benefits for current workers by inflating the portion of the state pension plan that was unfunded. This led the State Assembly to adjust pension benefits in a way that seemed to go against the law. Unions sued the state and State Superior Court Associate Justice Sarah Taft-Carter has just ordered the case to undergo federal mediation. But I’ve always thought the bigger issue for Rhode Island was that its pension fund had horrible investment returns; some of the lowest in the country. And Treasurer Raimondo has only taken steps this week to change the fund’s management.

Pension funds derive 60% of their revenues from investment returns on a national basis. The other 40% of revenue comes from employee and government contributions. Rhode Island pension funds have had sub-par investment returns for years. The first thing that I would have done was change the pension fund manager before making legislative changes. One year ago I wrote this:

[…]The problems Raimondo addressed were not the biggest that the state faced. The main problem with Rhode Island’s pension system is that it has very poor investment returns on its $6.5 billion portfolio of assets. Over the past ten years the state’s investments returned 2.47 percent compared with the national median of 3.4 percent (page 6). These returns are in the lowest tier of state pension plans, and this chronic underperformance is causing a substantial shortage of assets to pay retirees.

Fund fair Sandy repairs

I clicked on the live webcast of the U.S. Senate floor proceedings to find New Jersey Senator Robert Menendez pleading for Congress to take up H.R. 1, the Supplemental Appropriations Act that provides $60 billion in disaster funds for Hurricane Sandy. Unfortunately, Senator Menendez, in making his case for federal funding, was showing photographs of affluent Mantoloking, New Jersey. His advocacy shows why it is necessary for Congress to move slowly on the funding request to ensure that the spending gets to individuals and communities who really need assistance.

The proposed spending seems to fail to make distinctions between helping low income people who have no resources, and giving scarce resources to rebuild the summer homes of the wealthy. There was immense suffering in the aftermath of Sandy, but America is not rich enough to make the wealthy and the poor whole from the disaster. That is not the social compact that most Americans believe they have made as residents and citizens. How do we know exactly where the recovery monies will flow?

Mantoloking is a shore community with a year-round population of 296 (according to the 2010 Census) and a summertime population of approximately 5,000. Average income per person is $79,555,  versus average income of $35,678 per person in New Jersey and U.S. average income of $27,915, according to the U.S. Census. In a time when the U.S. is asking for sacrifices from its citizens, funding repairs for second homes would seem the last thing Americans can afford. When President Obama sent his funding request to Capitol Hill, one of the parameters he outlined was (emphasis mine):

  • # Editors & Key Contributors