Tax free municipal bonds--Look before you buy them! CROOK ALERT!!!
Municipal Bond Pitfalls Reported by Gretchen Morgenson in the NY Times 3-21-09
Gretchen Morgenson, assistant financial editor of the NY Times, continually looks out for the interests of investors. She never hesitates to challenge or pull her punches when reporting on shabby or dishonest Wall Street practices. This week she pointed out that despite financial difficulties facing many municpalities and other issuers of tax free bonds, many of these tax free bonds have traded at prices that do not reflect the impaired ability of the municpalities to pay the promised interest on their bonds.
Morgenson explains that when a municipality, state or hospital is in financial difficulty, it's required to issue a "distress notice" to bondholders and to file an annual report with the SEC on the condition of its finances. Morgenson reports that half of the 65,000 tax free bond issuers are behind in filing the required reports. One-quarter are chronically two to three years behind in filing their reports.
"Distress notices" required by the SEC nearly doulbed in 2008 over 2007. This is not surprising in view of the troubled finances of many issuers of tax free bonds. However, what is troubling according to Morgenson is that many of these bonds continued to trade at par value (100 cents on the dollar) even after a distress notice was issued. This means that buyers of the bonds are not investigating the financial soundness of the bond issuers before buying the bonds and, more troubling, the brokers, bankers investment advisers are failing to do their job of advising purchasers of the bonds that a distress notice has been issued on the securities.
Comment: Worse, brokers may be warning preferred customers of the notices and advising them to sell the bonds to others who are unaware of the existence of a distress notice on the bonds. Just another of Wall Street's dirty little secrets.
Fair Game--Red Flags that Muni Investors Can't See by Gretchen Morgenson in the NY Times March 21, 2008
- Fair Game - Red Flags That Muni Investors Can’t See - NYTimes.com
Full disclosure, that bedrock of fair securities markets, is the heart of the problem facing municipal investors.
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