The Myth of the Slow Crash

courtesy itulip.com

From the article "The myth of the slow crash revisited" from itulip;
"Every single working day in the month of December 2008:

• 190 U.S. companies filed for Chapter 7 or Chapter 11 bankruptcy protection
• 4,950 Individuals filed for bankruptcy protection
• 3,100 Homes went into foreclosure
• 26,190 Jobs were lost and 25,035 workers filed for unemployment insurance

The idea we are slowly moving towards hard economic times seems false when educated by the numbers. Math is always an immutable truth, unless you didn't pay attention in school. Then you wouldn't know the difference.

The shenanigans of Wall Street and their friends in high political office often greased the system to benefit themselves. No surprise, really, except to be consistently reminded of the various methods in which it was done, and how deep the damage will be.

"Ever drive down your street and notice the lousy roads and sidewalks but the fine new school buildings, and fire and police stations? Ever wonder why? Road construction comes straight out of tax revenue, but those buildings just might be paid for using bonds floated in insider deals where tax revenue can be leveraged, leaving yet another FIRE Economy liability that will climb onto the backs of tax payers in 2009 and 2010 as local property and income tax revenues plunge and waves of municipal bond defaults mark the next stage of decline of the 1980 to 2006 FIRE Economy."

At the heart of the sudden withdrawal of Bill Richardson from the nomination as Secretary of Commerce is the price-fixing surrounding municipal bond issues. More than 30 financial services companies have been subpoenaed concerning muni bond issues across the United States.

From the NY Times concerning what happened in New Mexico;

"CDR Financial Products, of Beverly Hills, Calif., is at the heart of the federal investigation in New Mexico. Investigators there are looking at how CDR Financial came to be selected as the “swap adviser” for a $1.5 billion program — called Governor Richardson’s Investment Program, or GRIP — to raise money for road and rail construction in New Mexico."

"CDR Financial and its founder, David Rubin, gave $100,000 to two of Governor Richardson’s political action committees in 2003 and 2004, and the company earned $1.5 million for advising GRIP in 2004. A Colorado political consultant, Michael Stratton, lobbied on behalf of CDR Financial, and was paid $269,000 by JPMorgan Chase during the same period, according to regulatory filings. JPMorgan was the lead underwriter on about $1.1 billion of bond sales for GRIP."

What this means is sweetheart deals for the companies underwriting the bonds. The bond investors probably paid a lot more than they otherwise would have, and the municipalities may have been saddled with a lot more debt than can be repaid in an economic downturn.

A friend of mine asked me last week why the principal in his muni bonds, which he had bought last year, had declined by 20%. One of the reasons could be due to the economic times. Less revenue means decreased ability to levy taxes which pays off the bond issues. Also, the market makers for these bonds, who are primarily controlled by the companies that underwrote them, know something the investors don't. Many bond issues might never have a chance of returning principal.

It's good to see the Justice Department and the FBI work on behalf of the little guy, even if only occasionally.