Bubble, Bubble, Toil and Trouble

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?

15 thoughts on “Bubble, Bubble, Toil and Trouble

  1. It’s all a house of cards. My fear is an avalanche of bailouts for these incontinent cities and states from the federal government, as if it is in any shape to bail anyone out…

  2. We have to come to terms with the fact that “retirement” at 65 or younger was for our parents. Most of us will have to work into our 70s and then if we do retire will have to live on very low budgets. And don’t count on that IRA either.

    1. AOW…that is what is happening here…the housing market has left our city and county with lower property tax revenues, so the council and commissioners are scrambling around trying to figure out ways to increase the tax rate or up the valuations to get more blood out of the turnip. The threat is, of course, the bond ratings for the city and the county will go from AA down and interest rates on debts will increase. So it just becomes a spiral of more debts, interest payments…and Greece here we come. When I last spoke to a banker about investments, he recommended …..government bonds. He proudly announced the tax benefits of government bonds. I thought, what planet is that bank on? What good are tax benefits if they all go belly up and the principle is lost? For the time being there seems no safe place for any money that will net any increase in investments. (save gold and silver I suppose.) Under the mattress is about as safe. Crazy days.

  3. Well, it’s already a give here in Los Angeles that a BK is inevitable. Meanwhile the mayor that helped drive the city into the ground is being touted as the next fresh new Democrat face. Yes, he’s going to take this show on the road.

  4. I always used the words, “Double bubble toil and trouble…”. But that was back in my bubble gum days:-)

    Having sold a few bonds when I was a broker, I must agree. Municipal bonds were and are still considered safe investments base on the idea that all the local entity has to do to meet its obligations is raise taxes. Not so. Even if the bond is insured, there is still substantial risk. Remember that it is insurance companies like AIG and Prudential that do the insuring, and there is no honor among those folks, either. Insurance and re-insurance companies can go bankrupt, too. Remember AIG and its bailout?

    The real lesson is risk. We are beginning to understand what risk is all about, and that the Federal Government cannot shoulder the risk for everybody. Somebody has to be on the paying end of the line to make it work, and the taxpayer is running out of money and patience.

    One part of the solution is to let those companies and governments go bankrupt and default on their obligations. Once that happens, there will be a coming to Jesus about the real meaning of risk, and maybe the Federal Government will learn that they cannot shelter people from risk.


  5. Massive cuts in services will have to happen, or massive tax increases will have to happen, or both, to keep many pensions and municipalities from going over a cliff. The politicians know that disaster is coming. JPMorgan and their hedge fund buddies know that it’s coming. The public, though it has a sense of impending doom, still doesn’t grasp the avalanche that is headed toward states and cities in the very near future.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s