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The Daily Reckoning Weekend Edition Saturday, August 21, 2010 Houston, Texas ------------------------------------------------------- The SEC goes after fraudsters in New Jersey...with all it doesn't have, Muni-bond investors beware: a worrying trend in State-funded ineptitude, Plus, all the past week's reckonings, archived for your leisurely consideration... --- NEW Presentation from Resource Trader Alert --- It's a Shame For You Not To Get Rich - When These Readers Do It So Easily! "I started out with $15,000. And I now have over $250,000!" - Mark Jacoby, New Smyrna Beach, FL Retiree "I made over $8,000 in 4 days." - James Kinley, Restaurant Manager, Hilton Head, SC "I opened an account with $15,000... The account value today is over $123,000." - Lorraine Filmore, Counselor, Harrisburg, PA That's just a small sample of hundreds of stories received from readers who use my research. But Could Yours Be One of Them? This New Presentation Tells You How. ------------------------------------------------------- Joel Bowman, checking in from Houston, Texas... No time for our usual scribbles this weekend, Fellow Reckoner. We're heading east across the Lone Star State, on towards our next destination, the new New Orleans. In the meantime, please enjoy today's guest essay, courtesy of one Mr. Ian Mathias. Ian is both a contributing editor for The 5-Minute Forecast and research analyst for our latest service, Addison Wiggin's Apogee Advisory. In today's column, he drills down into one of the key themes he and Addison have been following of late, something every muni-bond investor ought to be aware of... ------------------------------------------------------- Another Warning Shot for Bond Investors By Ian Mathias Baltimore, Maryland The United States experienced another interesting first on Wednesday. For the first time in the history of our union, the Securities and Exchange Commission brought charges against a State. The powers that be in New Jersey had been deceiving and misleading investors in regards to the fiscal well-being of the Garden State, and the SEC busted 'em. Bravo. That's where the good news ends. But first, the Cliff's Notes to this mess, according to the SEC's allegations: In 2001, New Jersey increased pension benefits for state employees without having the funds to cover new benefit expenses. For the next six years, at least, the state continued to underfund the pension system - but hid that information from municipal bond investors. On 79 separate occasions the state sold a total of $26 billion in bonds while "withholding and misrepresenting pertinent information about its financial situation," said SEC director of enforcement Robert Khuzami. In other words, they lied so that the bonds they were selling would appear more attractive. It's classic balance sheet fraud, committed by senior state officials working for both democrat and republican governors. And the state's bond underwriters - JP Morgan, Citi, Morgan Stanley, Bank of America, Barclays, Merrill and (of course) Goldman Sachs - all probably lied too. At the very least, they all failed to conduct due diligence before vouching for the quality of the state bonds. What's the penalty for this outright fraud? Nothing. The State of New Jersey will pay the SEC precisely zero dollars. Not one state employee will pay a fine either, or go to jail...not even lose his job. In fact, the State didn't even have to admit wrongdoing. "New Jersey agreed to settle the case without admitting or denying the SEC's findings," calmly explains the SEC press release. Come again? Essentially, the only provision of the settlement is Jersey's promise that it won't do this in the future. That's it. And Goldman Sachs, JP Morgan and all those other mega-banks? C'mon... They weren't even mentioned in the SEC's statement. It's worth repeating: We're talking $26 billion in bonds sold under purposely false pretenses. This isn't some small-time phony IPO. Pretend a company like McDonald's, which has a market cap of roughly $77 billion (that's about the same value of New Jersey's pension fund system) sold $26 billion in bonds under similar guise. Heads would freaking roll. They'd be lucky to not go bankrupt. Yet, here we are. New Jersey officials were so unfazed by the SEC settlement - the status quo was so unchanged - that they proceeded with a $2.2 billion bond sale on August 19, 2010. That's less than 24 hours after the SEC announced the results of their investigation. SEC investigators did a fine job forging into uncharted territory and exposing State fraud, but they offered literally the most toothless settlement possible. That's not to say no lessons have been learned. The smart investor should already be leery of municipal bonds, with so many states struggling to close budget gaps while honoring swollen pension agreements. Now you have all but absolute proof that State administrators are not only unable to balance their books, but they're willing to cook 'em too. Plus, there is really no incentive for States to change their ways, aside from a gentle tap on the wrist from the SEC. And this whole mess ought to (though it likely won't) highlight fundamental unfairness in the way we regulate the $3 trillion municipal bond market. Having the SEC patrol state funds is a hot mess of conflict of interest and political gamesmanship. At the end of the day, this is government policing government...an operation likely to be as inefficient as it is ineffective. Of course municipalities need a regulator, as they have proven unable to regulate themselves. But once the SEC discovers such a fraud, why not - at the least - order the state to hire a team of private sector auditors that will report their findings to the government every year for the next five...or as long as it takes for the State to get its act together. How's that for a stimulus plan? Auditing state pension programs would employ thousands of accountants for years. And those are real jobs, with a real purpose... Bean-counters could get back to work and bureaucrats would have to be just as responsible and forthright as the rest of us. While they're at it, those auditors can figure out exactly how long those struggling pension funds will last before running out of money. Wouldn't that be nice to know? We'll be on the lookout for an e-mail from Mr. Obama, asking for more details on our stimulus plan. In the meantime, know what you're getting into when you buy muni-bonds. Only one state has ever defaulted on its bonds - Arkansas back in 1934. So the odds are still in your favor. But reason is not. Now ethics aren't, either. Ian Mathias For The Daily Reckoning P.S. In the latest issue of Apogee Advisory, we gave a thorough case against the muni bond, highlighting its eerie similarity to the subprime mortgage bubble. But shorting state bonds is risky business, with small potential for payout, so we offered readers an unconventional way to profit from the plight of dubious states like California and Illinois. You can read our analysis for free, right here...we're still offering trial memberships of our newest publication. ------------------------------------------------------- ALSO THIS WEEK in The Daily Reckoning... Protecting Your Cash An Interview with Doug Casey from Cafayate, Argentina "...foreign exchange controls have been used since the days of the Roman Empire. A country debases its currency, raises taxes beyond a certain level, and makes regulations too onerous - and productive people naturally react by getting their capital, and then themselves, out of Dodge. But the government can't have that, so it puts on foreign exchange controls. They're almost inevitable at this point." Two of the Cheapest Stock Markets in the World By Chris Mayer Gaithersburg, Maryland Every year, I go to the Agora Financial Investment Symposium in Vancouver, both as speaker and attendee. It's jampacked with people from all over the world who gather at the Fairmont Hotel to share ideas. As soon as I walk into that grand old railway hotel, I know there will be some surprises. This year was no different. Protecting Your Cash, Part II An Interview with Doug Casey from Cafayate, Argentina "You know, back in the 1970s there was a spate of books published on financial privacy. In those days, financial privacy was still possible. Now, it's not only no longer truly possible, short of embracing a completely outlaw lifestyle, it's very dangerous to write about it or even talk about it. I kid you not. These days, people who ask too many questions about privacy techniques may well be government stooges..." The Land of the Future... Today By Chris Mayer Gaithersburg, Maryland Stefan Zweig pegged it right after all. In the late 1930s, the Austrian playwright and writer sought relief from war-torn Europe and settled in Brazil. He loved it. In 1941, he moved there and wrote his book Brazil: Land of the Future. Brazil, he thought, "was destined to become one of the most important factors in the development of our world." Deutschland Uber Alles Grasshoppers By Bill Bonner Ouzilly, France It has been 65 years since Europe's last major war. Still, when Germany gets up off its knees, the continent trembles. Last week, the Berlin government announced the best results since the wall fell in '89. From the first quarter to the second one the republic's GDP rose 2.2%. At that rate - about 9% a year if it continues - Germany is running neck and neck with China. Compared to France and the US, Germany is flying nearly 4 times as fast. Greece meanwhile is backing up. Its economy shrank 1.5% last quarter. --- Lifetime Income Report Announces... --- Government Retirement Headed for Broke - Shocking New Presentation... It's not in the news. The government wants to keep it quiet. But your retirement "safety net" officially begins to shrink this September 30. That's why you simply must watch this shocking new presentation - and get all the details on the "other" government-backed pension program that can pay you thousands of dollars each year. Learn the full story in this epic new presentation, right here. ------------------------------------------------------- The Weekly Endnote: RPG Grill...Onion Creek...Mi Luna... Fellow Reckoners spoiled us with plenty of recommendations for watering holes and eateries here in Houston. We'd have added a hundred pounds and acquired cirrhosis of the liver if we tried them all, but these ones were a good enough start. Thanks to everyone who wrote in. Oh yes, and who could forget a visit to Jimmy's Ice House, an old garage the owner had converted into the friendliest "locals only" joint in town? We wandered in just after dinner sometime during the week for a nightcap. The place is open air, more or less, with a sturdy, hardwood bar and a bare concrete slab underfoot. The jukebox sings out Hank Williams tunes into the balmy, late evening air. Regulars greet each other with a familiar nod. Cigarettes are stubbed out on the ground. After a couple of beers we found ourselves in conversation with Kellis, a thin fellow, about 80 years of age, with an uncanny resemblance to Clint Eastwood. The man is nothing if not passionate about the Republic of Texas and the standing army that, he says, will protect it when push inevitably comes to shove. "There'll be a [expletive] sniper behind every [expletive] tree if them bastards try anythin' funny," he told us, referring to the Washington- types he and his ilk so despise. "Don't mind Kellis," Les, an Englishman, and therefore the butt of many a friendly joke, told us. Of course, Les gives as good as he gets. "Kellis is known 'round here for blowin' off a little steam now an' then. Why doncha ask 'im about back when 'e used ta be a skinny fellow." "That was before I started working out," countered old Kellis, with a knowing wink. "We don't like them bastards tellin' us what to do," he continued. "They got their own affairs, and we got ours. In the end, each man gets what he deserves." "And whas that, 'ay Kell?" chided Les. The old man thought on it for a moment. "We all die eventually, be it one way or be it another. I guess thas what we mus deserve." "'nuther roun' then, eh?" Your wayfaring editor is on the road again this weekend. After a couple of weeks in the Lone Star State, we're heading east, through Louisiana and into New Orleans. Until next time... Cheers, Joel Bowman Managing Editor The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future Have You Heard of the OTHER Government Backed "Pension Program?"