Officials in the small cities of Lewisburg and Mount Juliet, and in Claiborne County, have complained that Morgan Keegan’s bankers failed to warn them about the consequences if the bonds’ insurer, Ambac Financial Group, was downgraded. When that occurred, the bonds’ interest payments quadrupled and the pay-off time increased. The cost of terminating the interest-rate swaps was exorbitant.
Experts in municipal bonds have said that bond derivatives are inappropriate for small towns and rural counties, and that higher fees associated with the derivatives often eclipsed any savings the transactions had provided.
Even worse, the folks hawking these financial deals, Morgan Keegan, were the same folks leading “day-long seminars” designed to inform city and county officials about the risks of the transactions.
Here, y’all will like this:
Asked if it had been a conflict for Morgan Keegan to serve as adviser and underwriter of the bonds, the governor said, “I think that really is probably at the core of what went wrong here.”
Gee, ya think?
You know, it’s not just homeowners and clients of Bernie Madoff who were sold investment deals they either couldn’t understand or else were not fully informed about. It’s municipalities like Mount Juliet and Lewisburg (and possibly Cleveland, TN), too.
Meanwhile, Morgan Keegan Managing Director Joe Ayres told the Memphis Commercial Appeal that the New York Time’s article was “politically oriented,” and that
some people look for a scapegoat for the effects of the world economic troubles, which is beyond the reach of his investment bank.
You buying that? I’m not. Especially when you remember that Morgan Keegan has been ordered to repay investors over losses incurred in the subprime mess:
The award – which is the largest arbitration award against Morgan Keegan’s bond funds as of late – set a precedent for pending arbitration lawsuits against the company, Stoltmann said.
“There has been some nefarious stuff that (has) come out in the last two months that has changed the dynamics of these cases and made them better,” he said. “An award like that is a real clear sign that the arbitrators were upset with what they heard.”
Wow, nefarious stuff, huh? Where have we heard this before? Sounds an awful lot like the greedy, predatory lending behavior of the folks at Countrywide Financial.
The problem, as Paul Krugman noted in his column yesterday, is that deregulation opened a Pandora’s Box of funny money deals that no one can understand, certainly not the average first-time home buyer and not even a city or county commissioner. So you rely on an expert in the investment banking world, someone like a Morgan Keegan. But when the guy telling you all the risks and benefits of these convoluted arrangements is the same guy making money off of the deal, aren’t you just asking for trouble?
You know, there oughta be a law. I'm just sayin' ...
Krugman waxed nostalgic for the days of “boring banking,” which he called
an era of spectacular economic progress for most Americans.
After 1980, however, as the political winds shifted, many of the regulations on banks were lifted — and banking became exciting again. Debt began rising rapidly, eventually reaching just about the same level relative to G.D.P. as in 1929. And the financial industry exploded in size. By the middle of this decade, it accounted for a third of corporate profits.
I agree that boring is highly underrated these days. Boring banking is fine with me, and we get that way by implementing some serious regulation of the banking industry. Whether it will happen, however, I don't know. Seems like a lot of folks have just accepted the fact that the financial world needs to be exciting and all Gordon Gekko-like because it's been that way for 20 years and it's all a lot of folks know.
[...] boring banking would mean poorer bankers, and the financial industry still has a lot of friends in high places. But it’s also a matter of ideology: Despite everything that has happened, most people in positions of power still associate fancy finance with economic progress.
I suspect folks at some city and county governments across Tennessee feel likewise. But unless there are some serious changes, we're going to be walking down this road again.