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TagsBY MAUREEN NEVIN DUFFY
NEWJERSEYNEWSROOM.COM
No one thought mortgages could become hot and sexy either. But we were wrong about that. Director Charles Ferguson took away the Oscar this year for his documentary, "Inside Job", which retold the intricate story of Wall Street's abusive buying and selling of every aspect of home mortgages with all the excitement and intrigue of a Jason Bourne adventure.
Now Wall Street is busily streamlining municipal bonds, the loans state, county and local governments take out to pay for capital improvements, which means stuff that lasts awhile as opposed to this week's payroll. The reality is of course that the money doesn't always go for long term improvements. Even the State of NJ was reprimanded by the courts for using proceeds from a bond to meet its operating expenses, such as payroll, rents, cell phones, etc. Another town did the same, but the authorities let it go. After all the State wasn't held to the law...
Muni bonds are already rated by the much maligned credit rating agencies, so traders can price related securities according to the bonds' credit risk, just as mortgage-backed bonds were rated, rather optimistically as it turned out. Investors can even check the ratings to see which bonds are subject to pesky tax caps and which ones were issued by governments willing to simply go back to taxpayers for endless supplies of cash payments on the loans. The agencies rate them higher.
The Street is tailoring government bonds to fit the winning mortgage market strategy, right down to selling shorts to investors who are gambling right now that governments won't be able to meet both their budgets and pay their loans off, given the crippling economy that still hasn't recovered from the subprime mortgage crash. The idea of course is not to repeat the mistakes and scams that plagued that other market.
Investment houses, some of which many people will recognize from the "Too Big to Fail" hearings on Capital Hill: Bank of America Merrill Lynch, Citigroup, Goldman Sachs Group, JP Morgan Chase and Morgan Stanley, are hard at work conforming muni bond contracts in order to trade them in groups called tranches. Sound familiar?
