Are municipal bonds the world's largest Ponzi scheme? Is 2009 the year that it all comes crashing down, as cities and states default? (Do they have any choice?)

Muncipals bonds, in theory, are perfectly legitimate. However, as municipalities became addicted to debt and unwilling to raise taxes, selling off the distant future to pay for the present and near future sounded pretty good to politicians. This all brings us to creatures like the MTA, needing new bonds to pay off the old bonds. Forget about transportation, its stated purpose.

Two recent articles are about the New York Yankees' misuse of municipal bonds, and one article in Saturday's NY Times deserves a look.

In Friday's New York Daily News, Juan Gonzalez wrote "Yankees want us to pay for fancy johns":

Less than three years after they got $942 million in tax-free bonds for a new Bronx stadium, the Yankees are at the public trough again.

With our city facing the worst financial crisis since the Depression, and more than 200,000 people expected to lose their jobs by the end of the year, baseball's richest team wants another $260 million in tax-free bonds to help cover a stadium cost overrun of $370 million.

Even worse, the city's Industrial Development Agency, which Mayor Bloomberg controls, is set to approve the bonds next week.

A similar column appears in Saturday's New York Times, where Jim Dwyer writes "At the New Yankee Stadium, Sanity Rides the Bench":

Now, beyond all sense or sensibility, the New York Yankees have appeared with a request for $370 million in new taxpayer-backed financing for a new baseball stadium that will open in April.

This is more. New. In addition to. On top of the $942 million in previous financing, and $660 million that the city is pitching in to replace parkland sacrificed for the new stadium and transportation improvements.

Now, about that Ponzi scheme. Also in Saturday's New York Times is "Regulator of Bonds Wants More Authority" by Mary Williams Walsh:

The board that regulates the municipal bond markets said Friday that it lacked the authority to properly regulate the industry, and asked the incoming Obama administration to include the municipal market in the sweeping reform of financial regulation it is expected to undertake this year.

(...)

The $2.6 trillion muni market is the last bastion of mom-and-pop investors, who arguably require tougher regulatory protection than the institutional investors that dominate the stock and corporate bond markets. Households own more than a third of all municipal bonds directly, and even more through mutual funds. The typical municipal bond trade is for just $25,000.

But the market is lightly regulated. With relatively little information readily available about individual bonds and their issuers, retail investors have had little choice but to assume that all is well.

Now, questionable payments to local officials who control municipal bond deals are being examined as part of a broad federal investigation of the market. Three agencies have been looking at possible wrongdoing for several years.

So the Municipal Securities Rulemaking Board is just as toothless as the SEC? Wonderful. I know $2.6 trillion doesn't sound like much money these days, but it's about $10,000 over the head of every American. China and other countries don't want to buy our debt anymore, and I can't blame them.

Will the municipal bonds crisis be the theme for 2009?

LINKS:

http://www.nydailynews.com/news/columnists/gonzalez/index.html

http://www.nytimes.com/2009/01/10/nyregion/10about.html?ref=nyregion

http://www.nytimes.com/2009/01/10/business/10insure.html?ref=business