The Tennessee city of Lewisburg got an unpleasant surprise this January when they discovered that their annual interest rates on a bond was now $1 million. Officials had gotten themselves involved in risky municipal bonds after speaking with investment firm Morgan Keegan & Co. at a state-sponsored seminar five years ago. Not only did Morgan Keegan offer them advice about these complex financial transactions, but their representatives made the deal.
Unfortunately, Lewisburg is just one of the hundreds of US cities and counties feeling the financial fallout because high-risk municipal bond derivates have gone sour. For example, officials in Tennessee’s Claiborne County were told by Morgan Keegan bankers that they would have to pay $3 million (an amount they can’t afford) to remove themselves from municipal bond derivatives. And in Mount Juliet, city leaders discovered that payment of their bonds had gone up 500% to $478,000.
Morgan Keegan has been able to dominate the lightly regulated municipal bond marketplace. Based in Tennessee, the investment company has sold $2 billion in municipal bond derivates to 38 cities and counties since 2001. Morgan Keegan reps say they’ve managed to save counties and cities money by providing lower interest rates. They also maintained that it is not their fault that the economic crisis has created turmoil in the bond market.
Now, however, federal regulators are trying to figure out how to restrict municipal bond derivative use. They also want to determine whether it makes sense for big investment banks to convince small counties and cities to take part in transactions that decrease interest rates but come with higher risks.
Morgan Keegan’s managing director Joseph K Ayres says that the investment firm is being unfairly blamed for the economic slump and that there was no conflict of interest when it advised municipalities and underwrote bonds. He says that the state of Tennessee had requested and approved the seminar and that the firm did not offer unbiased descriptions of municipal bond options or market any products during the session. Lewisville officials, however, say that Morgan Keegan failed to provide them with proper advice and did not fully explain the risks of their investment to them.
Investment banks make more in yearly income and fees from derivatives than from fixed-income bonds. In Tennessee alone, Morgan Keegan has made millions of dollars in fees. Unfortunately, it’s the municipalities and other investors who stand to lose a great deal.
Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Attorney Bill Shepherd has this to say: “As a former advisor to municipalities I can tell you that those who manage public funds depend heavily on their financial advisors to be not only truthful but candid about investment risks. It is disgraceful when unscrupulous “experts” abuse the trust placed in them to mine public funds for their own greed. Our firm currently represents a number of municipalities, credit unions, etc., which have lost hundreds of millions of dollars.”
Firm Acted as Tutor as It Sold Risky Deals to Towns, NY TImes, April 7, 2009
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