Ian Mathias regularly writes for The Daily Reckoning. His article from Saturday really struck a nerve with me. You see, in an era of helicopter money - when we literally have helicopter money (fiat money) raining down to earth, and when we NEED our bond markets to operate well, we find fraud. Item from Ian: 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 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.
Reading stuff like this makes me leery of them too. It makes me want to run to an investment with no items of debt or fraud behind them. You'll never see a gold coin convicted of fraud. Neither for a numismatic silver coin. Remember that when you consider today's gold news.