Bubble, Bubble, Toil and Trouble

Posted on June 19, 2012


My apologies to William Shakespeare whose famous line from Macbeth was: Double, Double, Toil and Trouble.

The intent of both lines is to create a sense of doom. There was a time, it doesn’t seem so long ago, when the word “bubble” brought to mind visions of our childhoods when we would see who could blow the biggest bubble or just make bubbles and try to catch them. Today, the word “bubble” first brings to mind the housing bubble bursting in 2008, from which our people and our nation still suffer. We have seen many economic bubbles in the past and we are constantly reminded of bubbles growing in Europe and most importantly our own national debt bubble. What we don’t hear so much about are the economic bubbles brewing in many of our cities and counties and states.

When I entered the words “municipal bankruptcies” in my search engine, I found that in February and March of this year that there were a few articles on this important subject. But, they didn’t seem to garner much attention. One such article written in March at the American Dream blog. The article, which I highly recommend, lays out ten signs that America is on the verge of a municipal debt crisis. This is sign No. 10:

#10 In all, there have been 21 municipal defaults so far in 2012.  The grand total of those defaults comes to 978 million dollars.

The article also has an excellent video on the effects of even minor increases in interest rates on our national debt.

So, if municipal debt bubbles are so serious, why aren’t we hearing about it from the major media outlets? More importantly, why aren’t we hearing about it from the big investment banks, of which J.P. Morgan is the biggest player?

According to this New York Post article, Morgan has done an in-depth study and found that there is indeed a major muni-bond crisis heading our way. Morgan, however, decided to keep their report secret. Well, except for a few of their best clients. And Wall Street wonders why the public is so down on them. Here are some excerpts:

OK, it’s no secret that nation’s public pension funds are in big trouble,  holding large “unfunded” liabilities owed to public workers once they retire.  But most politicians (New Jersey Gov. Chris Christie is an exception) will tell  you the problem is fairly containable, that there are simple fixes — such as  raising taxes on the rich or pruning benefits.

Not so, warns a “strictly confidential” report JP Morgan issued last year. It  describes in straightforward, frightening detail how underfunded pensions are  huge ticking time bombs for many of the nation’s big cities and states.

The scandal isn’t simply that most public officials are misleading the public  about the enormity of the problem and what steps must be taken to address the  matter. As the Morgan report notes, many of the real liabilities are located “off balance sheet,” hidden from the public’s eye, and lax accounting standards  let cities and states minimize their enormity.

It’s also that JP Morgan itself kept the report’s findings a secret except for a  few big clients, mostly hedge funds and large institutional investors, who got  the inside tip on which states and cities are most likely to default on their  debt as their pension liabilities fester.


Nationwide, the actual size of unfunded public pension liabilities is four times  larger than the $900-plus billion that officials are ’fessing up to. That’s  right, the bank sees a $3.9 trillion hole; to plug that, states  and cities will need large tax hikes, massive budget cuts or both. Plus,  public-sector unions will have to accept smaller retirement packages, and later  retirement ages, to keep the pension systems going.

Just how bad does the report say things are?

In New York, for example, JP Morgan said state officials would have to  immediately cut spending by 12.3 percent or raise taxes on everyone by  7.4 percent. And they’d need to make these tax hikes and budget cuts permanent  for the next two decades to fully fund public-employee pensions.

New Jersey faces an even bigger hole. Even after Christie’s reforms, it would  still have to cut spending 30.8 percent or raise taxes another 17.2 percent,  keeping them in place for two decades, to solve the problem.

Is this JP Morgan report proprietary information or not?

And why draw attention to an issue that might spook investors, cut off  funding for municipal governments and for the fees the bank collects on that  funding? A muni-market panic could land the bank in far hotter water than its  current London Whale travails.

But Morgan’s discretion may have broken the law: The report’s dire  predictions didn’t make it into investor-disclosure documents on at least some  bond deals that Morgan underwrote for states with the biggest liabilities. Legal  experts say that could violate federal anti-fraud statutes.

I don’t recommend you hold your breath waiting for Department of Injustice to take action.

Bubbles, bubbles and more bubbles. Will the appropriate governments act before it is too late?  We can only hope.

Well, that’s what I’m thinking. What are your thoughts?

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Posted in: Debt Crisis