The Municipal Bond Scam

In the coming weeks and months look for your broker to call you offering 5% - 6% yielding tax-free municipal bonds.

DON'T BUY 'EM!

Municipal bonds are issued by cities, states and counties to raise money for projects such as power plants, schools or water systems.

These bonds are historically very safe investments as they are backed by tax revenue generated by the project or the government agency itself. But there are times when muni's aren't very safe. Now is one of those times.

Consider this from Bloomberg.com:

The hangover from the collapse in real-estate prices is going to be a boom in so-called dirt-bond defaults.

These are bonds sold by municipalities to build the infrastructure for housing developments, and are backed by the taxes paid by all the new residents who are going to move in. If no residents move in, or too few do, the bonds aren't repaid.

(Translated: You lose your money.)

The Associated Press reported today that, "Gov. Arnold Schwarzenegger tells Treasury Secretary Henry Paulson that he's optimistic that California will be able to secure $4 billion in short-term loans to keep the state running."

So, what if he doesn't get the loan. Does the state go under? And if so, what happens to all those municipal bond owners that have loaned their money to the state in return for those nice fat tax-free yields? Yeah, you know what!

And this isn't the first time around this block for munis. This makes me think back to the early 90's when I worked as an Investment Counselor (salesperson) at Wachovia, and all of us were pushed to sell municipal bond funds to our customers.

"Hey these things have great rates, they are tax-free, AND they are safe!"

Shortly thereafter, about $5 billion in munis went bust.

So, ladies and gentlemen of the jury, in summation:

Municipal bonds are Wall Street's product of the day. They are an easy sell right now. That's easy money for the broker and his firm. And never forget, whether we call ourselves brokers, investment counselors, investment advisors, financial planners, investment planners, CFPs, MBAs, RIAs, CPAs, the CIA or MIAs, we are all salespeople when you get right down to it, and salespeople are going to sell you what you want to buy.

So when you are presented with munis just remember, this guy is either inexperienced, dishonest or stupid.

Either way, run screaming.



(I, on the other hand, am honest, smart AND good-looking. Now send me a check!)