Apr 8 2009
01:35 pm

To follow up on the post regarding the NYT article on municipal bond issues, I did a little poking around.

From the NYT article:

The risks of the transactions were, in fact, on the minds of members of the Tennessee legislature in 1999, when they passed a law requiring a municipality to follow several procedures before receiving authorization from the comptroller to enter a swap agreement.

Even with those regulations, the comptroller approved all 215 swap applications submitted in the state since 2001. “Tennessee was an unwitting conspirator in this whole mess,” said Emily Evans, a Nashville City Council member and former bond trader who was a critic of her city’s swap deal on the bond for the Tennessee Titans’ stadium.

One of the most important provisions of Tennessee’s law was education. In 2000, the state comptroller at the time, John G. Morgan, appointed nine government and industry representatives to establish guidelines for derivatives and devise a curriculum for the swap school. The panel included two lawyers from Bass, Berry & Sims and a Morgan Keegan banker.

Mr. Morgan said he had asked business professors to teach the course, but they had declined. “So the job was left for the people who know the most about these intricate transactions — the people in the business,” he said. “I didn’t think there was a problem.”

I don't know if characterizing the state's role as "unwitting" quite covers it. "Witless" might be more accurate.

Read the client roster at Bass Berry & Sims. Smack in the middle of the L-P list is this entry: Morgan Keegan & Company, Inc.

So, this is the upshot: The state appointed the company that was selling municipalities on the vehicle of derivative bonds to "educate" them about these products. Can you say "conflict of interest?" The state also appointed the firm that would (a) write the bond issues on behalf of the company that was selling the munis on the bonds, and (b) held a client relationship with Morgan Keegan. Bass Berry & Sims had a two-way financial stake here. Can you say "conflict of interest?" And the state gives the imprimatur of the state seal on the curriculum, thereby giving the signal that they endorse the products being sold.

In addition, Bass Berry & Sims has a practice specialty in "government advocacy." Read: Lobbying.

In addition, the firm appears regularly in support of clients’ interests before Tennessee’s:

  • Environmental regulators on enforcement, licensure and rule-making matters
  • Department of Revenue on state and local tax disputes and assessment appeals
  • Banking and other regulators in the Department of Financial Institutions
  • Insurance regulators in the Department of Commerce and Insurance on licensure and rate-setting matters
  • Professional regulatory boards in the Department of Commerce and Insurance
  • Department of Health on healthcare licensure and regulatory matters
  • Securities Division of the Department of Commerce and Insurance
  • Occupational and Safety Administration and other labor and employment regulators
  • Attorney General investigations and inquiries
  • Public utility commission, the Tennessee Regulatory Authority

Appearance of impropriety, anyone?

I'd have to say that no one was looking out for the munis best interest here. What an epic failure.

R. Neal's picture

Isn't Bass, Berry, and Simms

Isn't Bass, Berry, and Sims the same outfit the TNDP owes $80,000 for helping oust Rosalind Kurita?

Not that it's particularly relevant, but they sure seem to get around.

Mello's picture


R- you will recognize the name as that is the same group representing Blount County in their attempt to ignore TDEC.

Ragsdale2010's picture

And sprinkled about a number of Knoxville projects

and one of their attorney heads testified in the case regarding the convention center hotel that city provided bond funding would not amount to city assistance violative of the ordinance banning city assistance for a convention center hotel.

Wonder which law firm will be involved in any bond deals regarding the much balleyhooed hotel across the street from the convention center.

And is the community really better off with this mega peanut eating white elephant draped around city taxpayers year after year after year? Those millions could have been used to attract new business and industry to the community rather than sinking it into a surplus facility which does nothing but cat shows, weddings, bar mitzvahs, occassional business meetings, or fundraisers for Republican politicians if the Haslam family is supporting them.

Andy Axel's picture

TNDP is/was one of BB&S

TNDP is/was one of BB&S clients.

And (not that it's particularly relevant either), but Bredesen's [ETA: former] chief legal counsel Robert E. "Bob" Cooper is a former partner at Bass Berry & Sims. So I don't know how quickly we'd get a decent answer about the nature of the Chinese walls between who's "educating" (read: selling) shady investment vehicles to TN munis and who's giving them the information that they might really find useful.

Seems to me like the only relevant legal advice that they got was "press hard, there are three copies."

CORRECTION: Cooper is now state attorney general. He was legal counsel to Bredesen between 2003 and 2006. In his new capacity, he may be called upon to prosecute his former partners at BB&S, should the need arise.


Dirty deeds done dirt cheap! Special holidays, Sundays and rates!

Andy Axel's picture

Screwing over investors by

Screwing over investors by failing to disclose the potential downside seems to be part of the Morgan Keegan (a subsidiary of Regions Financial) business plan...

Another victory has been scored for investors who lost money in Morgan Keegan & Co. bond funds. On March 12, a Financial Industry Regulatory Authority (FINRA) panel awarded Jo L. Wright, a church secretary from Whitestown, Indiana, $18,000 for losses she suffered in bond funds managed by Morgan Keegan.

For more than a year, Morgan Keegan has been the subject of numerous complaints and investigations regarding a group of open end and closed end bond funds that were invested heavily in high risk asset backed securities.

As reported in a March 19 article in the Indianapolis Star, during 2007, when the crash of the subprime mortgage market took hold, individuals who purchased shares of certain Morgan Keegan funds began to suffer big financial losses, losses that investors say could have been avoided if only Morgan Keegan had disclosed the inherent risks associated with their investments.

Wright, who lost $11,000 in the funds, served as the first Indiana case to go to an arbitration hearing, said her lawyer, Mark E. Maddox of Maddox Hargett & Caruso, in the Indianapolis Star article.

Memphis based Morgan Keegan is a division of Regions Financial Corp.

Wright’s introduction to Morgan Keegan occurred via her local Indiana Regions bank branch manager. At the time of the referral, Wright had her money in a certificate of deposit and a savings account.

On the recommendation of the bank manager and Morgan Keegan, Wright transferred her money into the Morgan Keegan Select Intermediate Bond Fund, which she believed was a safe, conservative but higher-yielding investment.

According to the FINRA complaint, Wright was never informed that the Morgan Keegan fund was considered a risky investment, nor did she ever receive a prospectus outlining any risks or details about the fund.

And, naturally, Bass Berry & Sims is representing Morgan Keegan in associated class-action litigations stemming from associated investment losses (and presumably tabbing up the billable hours). And winning accolades in the process.

This is what they call "synergy" in business circles.


Dirty deeds done dirt cheap! Special holidays, Sundays and rates!

benintn's picture

You're asking the right questions but

this is a little like blaming ACORN for the mortgage foreclosure crisis. There's enough of a hook to hang them on, but...

This definitely needs and deserves more attention - and a better regulatory framework. But part of the problem here is that no one in the legislative branch understood swaps, and they were getting guidance and reassurance from the Swaps and Derivatives Association (which Phil Gramm's wife was connected to), and we were told that this was insurance and really wasn't necessary, blah blah blah.

The example of Mount Juliet is a good one. The reason their bond payments spiked has more to do with LIBOR, liquidity, and a lack of collateral (a problem that has to do with overleveraging and unsustainable growth). In the end, Lewisburg and Mt. Juliet made risky bets using taxpayer money. When credit dried up ... well, it's like Warren Buffett said: "When the tide goes out you can see who's been swimming naked."

Andy Axel's picture

part of the problem here is

part of the problem here is that no one in the legislative branch understood swaps, and they were getting guidance and reassurance from the Swaps and Derivatives Association (which Phil Gramm's wife was connected to), and we were told that this was insurance and really wasn't necessary, blah blah blah.

You're reinforcing the point. The state abdicated its fiduciary role under the assumption that Morgan Keegan would operate in good faith when educating the state about the instruments it had a financial stake in selling.

That is prima facie conflict of interest and the comptroller, as a guardian of the public trust and as a public official bound by state ethics law, should have put an immediate stop to it. MK was sole-sourcing the inception of these plans, the administration of these plans, and the education of these plans.

And, if you remain unmoved, let me throw this out there: the basis for evaluating what constitutes conflict of interest (or, if you peek at TN ethics statutes, potential conflict of interest) is the appearance of impropriety. MK can say it did nothing wrong, but as they were the "educator" as well as the prominent stakeholder in closing these sales, that definitely has the appearance of and potential for conflict of interest.

I don't know if you've ever conducted business with the state as a vendor. I have. Understanding Tennessee ethics regulations was mandatory annual training for me, and it was made very clear what the penalties would be if I ran afoul of them (job termination at a minimum, punitive measures such as fines and jail time were also outlined in stark relief).


Dirty deeds done dirt cheap! Special holidays, Sundays and rates!

Ron McHerron's picture

The members of the Tennessee

The members of the Tennessee General Assembly are notorious for looking out for their big business buddies. Today\'s New York Times gave us a particularly messy example.

In 1999, the General Assembly passed HB1530/SB1543, which allowed municipalities to purchase bond derivatives. It also allowed MorganKeegan to educate local governments about these bonds at the same time that the bank underwrites them.

Now the interests rates on these bonds have skyrocketed, and local governments are in big trouble across the state.

Three legislators now running for governor voted in favor of these bills. Kim McMillan on May 19, 1999. Roy Herron and Ron Ramsey on May 27, 1999.

Makes you wonder what these three would do to our state.

benintn's picture

So, it's the legislature's fault?

I'm sorry, but there were very few who could have predicted the gigantic financial cluster**** that happened from 2001-05 under Bush.

Agree that this issue needs to be addressed and that we need more and better SMARTER regulation. But I don't think you can really blame Morgan Keegan's guidance or Bass Berry's lobbying, nor can you blame Herron or Ramsey or McMillan for this.

Now, one of the people who DID voice concerns 10 years ago was Ward Cammack. And this is a guy who understands what went wrong and how to make it right.

But according to some of the purity trolls, Ward's not a real Democrat and therefore shouldn't be considered.

Which leaves us with ... Zach Wamp?

Andy Axel's picture

I don't think you can

I don't think you can really blame Morgan Keegan's guidance


Investors in six Regions Morgan Keegan (“RMK”) bond funds lost $2 billion in 2007. This paper explains how extraordinary and undisclosed risks allowed these funds to generate higher returns than their competitors for many years but ultimately caused the funds’ collapse in 2007.

The investors’ losses were not the result of a “flight to quality” or a “mortgage meltdown.” Diversified portfolios of high yield bonds and mortgage-backed securities did not suffer significant losses as the RMK funds suffered massive losses. The RMK funds collapsed because they held concentrated holdings of low-priority tranches in structured finance deals backed by risky assets.

RMK did not disclose in its Securities and Exchange Commission filings the risks it was exposing investors to by investing the majority of its portfolio in subordinated tranches of asset-backed securities until after the losses had occurred. RMK also misrepresented hundreds of millions of dollars of asset-backed securities as corporate bonds and preferred stocks in its SEC filings thereby making the funds seem more diversified and less risky than they were.

RMK further misled investors in its SEC filings and marketing materials by comparing its funds to the Lehman Brothers Ba Index. This index contains only corporate bonds - no asset-backed securities which dominated the RMK funds’ portfolios and which resulted in virtually all the investors’ losses. RMK also misled investors by claiming that its funds were diversified.

Six RMK bond funds – four closed-end funds (RMH, RHY, RMA and RSF) and two open-end funds (MKHIX and MKIBX) - collapsed spectacularly in 2007. The six funds had higher returns and yields than their peers in years prior to 2007, but lost 62% on average in 2007 while their peers had positive returns or only modest losses.

Maybe Regions Morgan Keegan demonstrably displays a pattern of egregious conduct as it comes to disclosure...

According to investor complaints, Regions Morgan Keegan marketed and sold the bond funds as “relatively conservative” investments. Investors never knew about the hidden risks of the funds or the fact that mortgage-backed securities and collateralized debt obligations comprised more than 50% of each fund’s portfolio.

So far, FINRA has returned awards totaling more than $600,000 for investor claims over losses suffered in the RMK bond funds. The most recent awards were decided in March 2009 by FINRA arbitration panels in Indiana and Alabama.


In almost every case, the asset-backed securities held by the RMK funds were virtually always the most risky tranches in asset-backed securities deals, according to the SLCG paper. As an example, SLCG examined the portfolio of the RMK Multi-Sector High Income Fund (RHY), and identified whether the tranches held were senior or subordinated for 147 of its 161 asset and mortgage-backed securities. Only nine of the 147 tranches were senior; 138 of the 147 were subordinated.

Morgan Keegan always has been keen on letting investors know that it performs “in-depth and detailed evaluations” on all of the bond funds recommended to retail clients. The company’s so-called due diligence is supposedly one of the hallmarks of its operations. If that were the case, however, any evaluation that had been performed on the six RMK bond funds would have uncovered RMK’s misrepresentation of risky asset-backed securities as corporate bonds and preferred stocks, as well as disclosed the highly leveraged credit risk in the low-priority asset-backed securities held in the funds.

The bottom line: The catastrophic losses suffered by investors in the RMK funds did not have to happen. From the outset, Morgan Keegan failed to fully or accurately inform investors in its bond funds of the risks regarding the subordinated tranches that the funds held. Only after massive losses occurred did RMK reveal this critical detail.

But sure, maybe those investments had some risk. Do you actually believe that it was ethical for the state to have the firm that stood to reap financial gains in fees for selling these instruments to be explaining the "ins-and-outs" of the program? The state used taxpayer money to finance sales seminars on behalf of Morgan Keegan.

But hey, let's not stand in your way of grandstanding for your favored candidate.


Dirty deeds done dirt cheap! Special holidays, Sundays and rates!

Middleguard's picture

Where can I find this

Where can I find this evidence that Ward Cammack voiced concerns 10 years ago? Just exactly what did go wrong and how does one make it right. Maybe Ward should forget about the Governor's seat and go straight to DC for a cabinet seat. I am sure President Obama would love to talk to someone that new something 10 years prior and also knows how to fix it.

R. Neal's picture

I predicted problems more

I predicted problems more than ten years ago, when I sent President Clinton a letter outlining my strenuous objections to repealing the Glass-Steagall Act. His office sent a nice letter in return about free markets and competing in the changing global economy or something like that. I still have it around somewhere.

Middleguard's picture

R. Neal, You have proof that

R. Neal,
You have proof that you actually did something and I believe you did. Given that you might want to consider running for office someday since you have earned some trust . Ben takes this oppurtunity to put Ward Cammack's name out there again and then takes a dig at someone's opinion that maybe he ain't democrat enough. Maybe Ben should not take every oppurtunity to remind us of that. I am still searching for someone to support on the D side in 2010. I also think it would be a positive if Camack did actually believe in something 10 years ago. But since he is running for office I would like proof.

Middleguard's picture

R. Neal I also just realized

R. Neal
I also just realized the benintn above is not verified like me. So maybe it is not the same benintn that I am thinkg of.
Have a good day.

Andy Axel's picture

If he's read anything I've

If he's read anything I've written on Cammack, he's probably taking a dig at me, which is fine.

And if anyone's not "Democrat enough," it's probably me - because the idea of what a Democrat should be around these parts doesn't describe me in the least. Fair enough.

I take issue with the doe-eyed innocence routine being perpetrated by the state and by the players - there was a lack of transparency here, a lack of disclosure of vested interests, and a whole bunch of "I didn't think there was anything wrong." Not one soul was doing anything wrong, which is why there's such a tremendous mess now? Right.

You ask me, I think a lot of this goes back to the fervent anti-tax religious warfare which has made localities strapped for cash. Of course, people want public services, but then they also don't want to pay for them. So a town like Lewisburg needs a new sewage plant? Float a bond! And yeah, cities do stuff like this all the time. However, sounds like the T's & C's of these swap bonds weren't fully looked at, thought out, or explained.

It's now apparent that what they bought was the functional equivalent of a payday loan - get the cash now, but pay usurious interest into perpetuity.


Dirty deeds done dirt cheap! Special holidays, Sundays and rates!

KC's picture

Education? Seminars? Oh I

Education? Seminars?

Oh I love these euphenisms!

First, businesses don't "educate."

They market goods.

People who market "investment" goods are always looking for new investors, preferably the kind who don't know a lot, but are more than willing to place all their faith in those selling the investments.

Those "seminars" are essentially group-think gatherings where the belief to trust in suits, who can speak the lingo, is encouraged and strengthened.

And the less regulation the better.

Like the snake-oil salesmen who always got the wagon down the road when he saw the sheriff. Unless he had the sheriff in his pocket.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.

TN Progressive

TN Politics

Knox TN Today

Local TV News

News Sentinel

State News

Local .GOV

Wire Reports

Lost Medicaid Funding

To date, the failure to expand Medicaid/TennCare has cost the State of Tennessee ? in lost federal funding. (Source)

Search and Archives