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Tax free municipal bonds--Look before you buy them! CROOK ALERT!!!

Updated on April 19, 2011
Gretchen Morgenson
Gretchen Morgenson

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.

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    • bgamall profile image

      Gary Anderson 

      7 years ago from Las Vegas, Nevada

      Wow, Ralph, we can see the bond market in distress even now in 2011!

    • profile image

      squeal 

      9 years ago

      Your looking for a (possible)crook in the the Bond business?

      Start 2nd down from the top in N.M.B. Fl. _ _ S Bonds

      I smell a RAT!

      she always was greedy, too greedy

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      9 years ago from Birmingham, Michigan

      Read this article http://www.nytimes.com/2009/03/22/business/22gret.... Apparently the risk currently in municipal bonds is not adequately reflected in their ratings and their prices. Perhaps you should consult a fee only financial adviser. (Fee only means the adviser is not getting a commission on the funds or other investments he recommends.) Depending on how much money you have to invest a municipal bond fund like the ones offered by Vanguard and Fidelity would be the way to go. Unless you have a lot of money to invest you would not be able to invest directly in enough municipal bonds to spread the risk which apparently is higher than in the past. Here's a link to Vanguard's website https://personal.vanguard.com/jumppage/simpletruth... Here's a link to Vanguard's California Intermediate Tax Exempt Bond Fund https://personal.vanguard.com/us/funds/snapshot?Fu...

      [I have no financial interest in Vanguard other than as a very satisfied investor.]

    • profile image

      sabrina 

      9 years ago

      Hello I am interested in investing in municipal bonds/ I am new to this, is there anything I should ask and/or do before investing?

    • profile image

      ColdWarBaby 

      9 years ago

      At this point I would suggest that the best thing people could invest in would be independence and survival. Make your home energy independent, learn how to provide for your needs and let the market and all the parasites it has spawned go down the toilet and into the cesspool of its own creation.

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      9 years ago from Birmingham, Michigan

      Right now there's hardly any safe place to hide. Money market funds and government insured deposits and CDs and U.S. government bonds. That's about it unless you want to buy gold which never struck me as a very good idea because of the storage cost and the absence of any interest on it. Sooner or later broad based index mutual funds will be good again.

    • countrywomen profile image

      countrywomen 

      9 years ago from Washington, USA

      Nice advice. You do have lots of financial wisdom which many like me get to benefit from. Thumbs up for another informative hub.

    • Paul Edmondson profile image

      Paul Edmondson 

      9 years ago from Burlingame, CA

      As the market has declined, lots of people have tried to move to quality investments. My in-laws have tried to do just this, but it is troubling to think that these municipalities may be in as much trouble as Ford. At least the yield on Ford bonds (don't think they are trading anymore) reflects the risk - it was over 30%.

      This is pretty terrible for fixed income investors for two reasons. First, they are most likely taking much more risk than they desire. Second, they aren't get the actual risk adjusted returns.

    • Hawkesdream profile image

      Hawkesdream 

      9 years ago from Cornwall

      Why is it that everytime there appears to be a 'financial crisis' it's always the little guys that suffer most. We all know it, we should all heed our own advice, but we still think that a miracle cure is out there..it's not , it never will be ..the crooks are out to get us and if we aren't aware of this , they will win.

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      9 years ago from Birmingham, Michigan

      Tnx for the comments. There sure seem to be a lot of "dirty little secrets" some legal, some not. All immoral.

    • William F. Torpey profile image

      William F Torpey 

      9 years ago from South Valley Stream, N.Y.

      Thanks for the "heads up," Ralph. Maybe our financial crisis will awaken many of us to some of Wall Street's dirty little secrets. Thumbs up.

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      9 years ago from Birmingham, Michigan

      I have a long memory! More than 70 years.

    • Vladimir Uhri profile image

      Vladimir Uhri 

      9 years ago from HubPages, FB

       

      Hello. Thanks for valuable information.

      Hej, you are too young remembering an old good capitalistic system.

      Or am I off of the line?

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