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Thread: N.J. Gets Nailed by the SEC ?

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    Banned Eric Stoner's Avatar
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    Default N.J. Gets Nailed by the SEC ?

    Last week New Jersey became the first state EVER accused by the SEC of violating federal securities laws, Between 2001 and 2007 , it failed to tell investors ( bond buyers ) that it was underfunding its pension funds. In 79 bond issues totalling more than $26 billion : " The Treasurers did not read official statements ... relied on staff to ensure accuracy ... had no policies or procedures for review or update of bond prospecti." It was only after a N.Y. Times article reporting the diversion of billions from various pension funds that N.J. updated its disclosures. AFTER $26 billion in bonds had been sold.

    N.J. settled the allegations by neither admitting nor denying the allegations but promising not to do it again.

    The SEC would not say if other enforcement actions are pending against other states but most observers think there are.

    While seemingly a slap on the wrist , and even less than that, it is important to note that N.J. was NOT able to blame this on bankers , brokers, lawyers or advisors. It is key to recall that back in 1975 N.Y.C. was no longer able to sell short term bonds because NOBODY on Wall Street was willing to underwrite them. Nobody wanted to be subject to investor lawsuits when, not if, when those bonds went into default. Look for that to start happening with California, N.Y. and other state bonds.

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    Default Re: N.J. Gets Nailed by the SEC ?

    ^^^ NJ former governor John Corzine is a major Wall St. insider as well as a democrat ... thus it doesn't surprise me one bit that this outright 'fraud' re cooking NJ's books wound up being quietly 'settled'.

    As to a potential replay of NY's mid-70's default on their muni bonds happening in CA or IL or NY or NJ, I can't see any way that the FED would allow that to happen. In all probability, the federal gov't will pull a Fannie / Freddie i.e. using federal taxpayer money ( collected from taxpayers in all 50 states ) to guarantee the bond debt of these functionally bankrupt states. Failure to do so would cause the 'uber-rich' residents of CA, IL, NY, NJ etc. who are increasingly sheltering their wealth via the purchase of tax free muni bonds issued by these high tax states to take a major loss on principal value of their tax free muni bonds.

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    Default Re: N.J. Gets Nailed by the SEC ?

    If I get caught doing something, I think I will try the ole "I promise not to do it again" defense. Should work out, right?

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    Banned Melonie's Avatar
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    Default Re: N.J. Gets Nailed by the SEC ?

    ^^^ already did !!! NJ settled without an admission of wrong-doing, a fine, and a promise not to do it again !!!

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    Banned Eric Stoner's Avatar
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    Default Re: N.J. Gets Nailed by the SEC ?

    ^^^ N.J. wasn't fined a nickel.

    You are right about Corzine. Rather than make truly tough choices including cuts in spending, Corzine used every bookeeping trick in the book. Leaving his girlfriend out of it, because for one thing, they were never properly investigated, Corzine was simply too beholden to the teachers and other public employee unions to do the necessary. That's one reason it is so ironic that one of his budgetary tricks was NOT to properly fund their pensions. The Teacher's Pension Fund alone is AT LEAST $10 billion short. The state highway fund was completely broke until it got an injection of Porkulus funds which of course will run out.

    As far as Fed guarantees of state debt, Bernanke has not said a word about it. But several of his fellow governors of the Fed are on record as saying: "NO". Obama, to his credit has said : "NO" but he has also signed piecemeal bailouts like the recent $26 billion "Cop &Teacher" bailout bill.

    This highlights a farseeing prediction made in the late 1970's about the Chrysler bailout which echoed a prediction made by Bill Buckley and Milton Friedman ( among others ) about the NYC bailout a few years before. The fear was not that the bailouts would fail, but that they would succeed. The reasons being that 1. bad precedents were set and 2. the cost of bailouts NOW is much, much higher than they were way back then.

    Oh, the predictor on the Chrysler bailout ? Alan Greenspan.

    Returning to the original topic, the SEC has served notice that proper underwriting will be required on all state and municipal issues. Look for banks and brokerages to avoid subjecting themselves to liability and refusing to underwrite and sell the shakiest of state and local paper.

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    Default Re: N.J. Gets Nailed by the SEC ?

    ^^^ and that will merely drive up interest rates paid on state and local muni bond issues ... which directly benefits rich Americans for whom the tax free status means the most in terms of tax savings !

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