Bloomberg reports that J.P. Morgan has been sued by the Louisiana Police Pension Plan for securities fraud, and this charge only scratches the surface of the company’s misconduct.FoxBusiness reports that in a “strictly confidential” report issued last year, J.P. Morgan admitted that underfunded pension liabilities amount to nearly $4 trillion—far worse than most observers believed. Fixing the shortfall would require drastic, politically unpalatable service cuts or tax hikes. As Charles Gasparino notes in the New York Post, New Jersey would either need to raise taxes by 17.2 percent or cut spending by a breathtaking 30 percent to put its pensions on firm footing. Other states and cities are in a similar bind.These figures could undermine the entire system of municipal credit, to say nothing of pensions themselves. Investors in municipal bonds desperately need to get a grip on these figures because they could impact the creditworthiness of states and cities with large hidden pension liabilities. So why did J.P. Morgan hide the report?
But people in senior management worried that the study’s stark analysis about the looming threat of unfunded pensions to state and local finances — and its recommendation on how to fix the problem — would offend the firm’s municipal bond clients, namely those cities and states that tap J.P. Morgan to underwrite their bonds.With that, the firm decided that it would keep the study largely under wraps, according to people with direct knowledge of the matter. Only its best hedge fund clients and large institutional investors would receive the report. The cities and states at the heart of the analysis wouldn’t be informed, nor would most public investors. . . .
I got my hands on the report not from an disgruntled employee looking to even up the score with his old firm, but from someone who believed the reason JP Morgan kept it a secret stinks to high heaven: Bankers there are afraid of upsetting state and city officials who hand them large fees to underwrite municipal bonds.
So JP Morgan may have buried this bombshell because politicians in bad-credit states would retaliate by cutting it out of their business. J.P. Morgan is Wall Street’s largest underwriter of municipal bonds and is legally obligated to disclose any concerns it has about the viability of these bonds to its clients. Clearly, they did not do this—or at least not with all clients. The fact that they revealed the information to hedge fund managers and not regular investors is the icing on the cake: did the fat cats know something that ordinary investors didn’t? This news reinforces every negative stereotype about big finance, and it is difficult to imagine the public reacting to this story with anything other than widespread scorn.Worst of all is the fact that the people who really needed to know this information—retirees and current workers in state and municipal government—aren’t getting the best available information that would tell them more about whether their pensions are secure.