Twenty years ago today, on April 5, 1993, the Detroit Free Press published my investigation into a financial abuse known as Capital Appreication Bonds. A year later, the Michigan Education Association awarded the Free Press and me its School Bell Award for alerting the public to the dangers of Capital Appreciation Bonds. But the most important achievement of those 1993 CAB stories happened in the Michigan Legislature. In 1994, lawmakers banned CABs in Michigan. On the twentieth anniversary of my first CAB stories, here are some thoughts on CABs, news, and public finance.
By Joel Thurtell
If you’d uttered the words “capital appreciation bonds” a year ago, most people would have thought you were babbling nonsense.
CABs are a form of municipal bond so (perhaps intentionally) obscure that when I was researching them in the early 1990s, the industry textbook* didn’t mention them.
California requires that all governments issuing municipal bonds have a citizens watchdog Bond Oversight Committee to monitor borrowing. In April of 2012, a member of a California school district’s Bond Oversight Committee noticed an odd-sounding term in the fine print of bonds her schools were issuing. She googled “capital appreciation bonds” and “ban.”
By early 2013, googling for CABs brings up dozens of published mentions of Capital Appreciation Bonds.
CABs are on the radar now. The New York Times, Los Angeles Times, Bloomberg, National Public Radio, and many, many smaller news outlets mostly in California have written about CABs.
What was that lone hit the googling Bond Oversight Committee member found in April of 2012? “Muni ripoffs — same old same old,” was published on joelontheroad January 9, 2009. That one blog story contained all eight articles about CABs that I wrote for the April 5, 1993 Detroit Free Press.
I wrote an introduction explaining that acting on my Free Press stories, the Michigan Legislature in 1994 banned CABs. The bond committee member was dreaming of a ban for California and found there was indeed a ban, 19 years old, but in distant Michigan.
Acting on our recommendation and findings, the Michigan Legislature in 1994 also mandated competitive bidding for muni bond deals, thus eliminating an additional and unnecessary profit center for bond promoters.
Last April, the California Bond Oversight Committee member told me that California school districts were issuing CABs with enormous rates of interest that could push those districts into default decades in the future. At that time, the only people aware of the situation and who had a desire to stop CABs were this alert committee member in California and me, the guy known by some Californians as “the Michigan blogger.”
I’m very proud of what we at the Detroit Free Press accomplished with our CAB stories. One thing did not happen here. There was no general media cry of outrage. Unlike California, where local news organizations have produced their own localized CAB stories, no other Michigan newspapers ran stories examining CABs in 1993. It didn’t matter. Legislators were outraged, and they permanently stopped CABs in Michigan.
With that CAB-killing history in mind, I thought it might be possible to ban them in California. One element was missing: I’m retired, and no longer enjoy the power of a large-circulation daily newspaper to blast angry pages through the countryside.
But I have my blog. In 2008, I learned — well, a lot of us Michiganders learned — what this blog can do when I wrote about my encounter with the shotgun-totin’ goon. This hireling of billionaire Ambassador Bridge owner Manuel “Matty” Moroun had kicked me out of a public park. Until then, Moroun was virtually invisible to Detroit media. My angry report — and numerous JOTR follows — about the high-handed Matty Moroun put his name on the lips of Michiganders.
I wanted to inform Californians about the CAB scandal and mobilize public opinion against not only these pestilential bonds. I wanted to pillory the elected school board members and school administrators who were approving these financial holocausts.
I wanted to blast CABs the same way I opened the gate to covering Matty Moroun.
So what is this blog, joelontheroad? JOTR does not have an office. Who needs an office? I did Matty from my computer. It doesn’t matter where I am sitting.
So the Bond Oversight Committee member and I collaborated.
My first California CAB story ran on April 27, 2012: “Muni bomb ticks in California.”
I wrote:
There’s a school bond scandal brewing as California schools load taxpayers with horrendous debt for the next generation of taxpayers.
The blight is called CABs — short for Capital Appreciation Bonds.
I gave a short historical overview:
It hit Michigan in 1988. Within four years of the first CAB issue, Michigan public school debt had doubled to reach more than $4 billion. That was just principal. The interest on the CABs amounted to 200 percent — 300 percent — even 575 percent of principal, depending on the terms of the individual bond issue.
I described the difficulties of understanding CABs, spawned in “this fascinating but arcane world with its private argot strewn with obscure words like ‘zeroes’ basis apsis points’ describing fairly simple things in language you need a special dictionary to comprehend. It’s an industry with specialized documents that seem encrypted so that people like you and I will have trouble understanding them.”
My biggest concern, though, as I began publishing articles about CABs, was that the subject would be treated by California media in the same way it was treated in Michigan when we published CAB stories in 1993: with a huge yawn, followed by continued slumber.
Because most journalists are lay people not indoctrinated into these clubby ways, and because municipal bonds are not well known as the powerful economic motors they are, journalists don’t look closely at this business that accounts for trillions of spending with virtually no accountability and the lightest of pseudo-regulation.
In Michigan, there was a cartel of businesses that controlled school bond issuing, with — in the early 1990s — two bond underwriters sharing nearly all the business; two law firms were also cut into the deals, as was an Ann Arbor financial advising firm. I learned of lavish trips to New York ostensibly paid for by the supposedly independent financial adviser, who introduced school officials to bond rating officials in Manhattan, although those meetings produced nothing of benefit to the schools; the cost of the trips, together with Broadway plays, was eventually billed by the “independent” adviser right back to the schools. School officials were being bribed and their taxpayers — already on the hook for huge unnecessary interest costs — were made to pay for their officials’ personal spending sprees.
Another word: bribes. Payola was going on in Michigan, and I recommend that Californians ask whether school officials received money or gifts worth money from bond hucksters.
I hear that California may limit CABs, but is unlikely to outlaw them, as Michigan did. That is too bad. Californians deserve no less than a total ban on these monstrous drains on community resources.
I said it on April 28m 2012, and I’ll say it again today:
“Michigan killed CABs; California can do it too!”
* Fundamentals of Municipal Bonds, Public Securities Association, Fourth Edition, New York, 1990.
