Clean Up The Securities Industry

Sunday I read a well written article in The New York Times about the municipal bond business. It seems a large issuer of something like $750 million in municipal debt was not making their current financial statements available to the rating agencies and thus to the public that holds their bonds. The issuer, a hospital authority, received a BB rating for their debt after a reorganization and a name change, but not keeping the market current on their financials was causing investors and market makers a problem. As a result, where no information is available, the market makers have these bonds priced at a significant discount, like 83 cents on the dollar.

Over the last several months, I have called for better and more comprehensive regulations, oversight and auditing of the securities industry. Perhaps what is needed is just for the existing regulations to be enforced as this alone would prevent the losses that are occurring. The whole mortgage meltdown could never have gotten off the ground without the rating companies giving their AAA rating to mortgage debt that should never have seen such a high rating in the first place. If an investor wants to buy high yield debt and take the added risk, then that is their choice. But, placing a AAA rating on a piece of debt, a bond, that does not deserve that rating should be met with a serious response.

So much pain and suffering in the mortgage market and even the municipal bond market can be avoided if the people involved would do their job correctly. Perhaps it is time for the administration of justice to take a closer look at the efforts of some to mislead and in some cases simply defraud the investor because of their own greed.

Going back to the role that pension fund trustees could play to clean up some of the abuses in the securities industry strikes me as a good idea. But, as I said before, few pension fund trustees are knowledgeable enough to organize and bring pressure to the issues of proper enforcement of the securities industry’s regulations.

When information is with held from the public on an issue of municipal bonds that have been underwritten and sold, someone should be held accountable. If that means someone goes to jail, then perhaps that is what it takes to get those individuals responsible for the timely disclosure of financial information to take their responsibility seriously.

What the public should demand is that financial information as well as due diligence be carried out in a timely manner. There is unfortunately too much greed and attempts to defraud the investing public of the trillions of dollars of debt and equity investments in the public domain for timely financial disclosure to be dealt with so lightly.

The securities industry benefits from the ignorance of the investing public and the lack of organization among the public and private pension funds and other large fund trustees. What is needed is for someone to organize this group and use its financial muscle to bring about the kind of responsiveness and reform that would clean up much of the abuses that go on in the securities industry.

Additional reading for those interested in hearing it from a PhD in economics. The Sunday New York Times Magazine, August 17, 2008, "Dr. Doom" pages 26 to 29, is a nice read about an economist by the name of Nouriel Roubini and his thinking about the current economic crisis. Many economists have the academic training, but few have actually worked in the securities industry to understand the specific areas where better and more comprehensive regulation should be enforced. Those individuals that fight against better regulation permit the abuses to continue and the greed and fraud to go unchecked. Even with all the borrowing that we as a nation do, it is not the borrowing that has brought on the meltdowns, but the abusive practices associated with the borrowing that have brought about the crisis. A hammer or any other tool can be misused. In the case of the hammer, it is for hitting nails, not your thumb. Until we stop hitting our thumbs, we are going to continue to suffer a lot of pain.

Stay tuned.