Tuesday, August 24, 2010

SEC Charges The State of New Jersey with Securities Fraud: The Catalyst for the Second Financial Implosion?

For decades, state and local governments have made up for excessive spending and budget shortfalls by cooking the books in all sorts of ways that would get the SEC's attention at public companies.

Things like making loans to oneself and recording the interest paid as income to the parent.

Or claiming to earn 12% per year on investment income as to severely underpay pension plan contributions which, of course, are now coming due.

Selling and leasing assets to itself, borrowing against future income that never materialized, on and on, you get the picture.

Well, so finally has the Securities and Exchange Commission which has officially charged the State of New Jersey, yes the State itself, with municipal bond securities fraud.  Here is the official SEC press release on the subject.

I see this case as the catalyst for what is likely to come next, in waves.  The SEC did a great job on this case and should be commended for following through with this type of action.

Public sector defaults and bankruptcies, cities and towns and even state governments unable to pay their own bills.

With many of these governments resorting to fraud and other "creative" accounting to fudge the official numbers while ignoring the obvious, that a government can only spend as much as it takes in over time, and that borrowing long to raise money to pay operating expenses is a recipe for financial suicide. 

What began with Lehman Brothers and the subprime mortgage crisis quickly spread worldwide.

Federal and state governments across the world have overspent while undercollecting tax revenue.

What New Jersey is nearly unbelievable to me.  Little penny stock outfits from the pink sheets play accounting games like this, not states where George Washington once slept, and fought.

Look for more state and SEC securities actions.  The SEC bar is going to love the next few years.  Enough hours to put someone's entire family through college and then some.