The SEC Catches Up To One Of The Small Fry

The Wall Street Journal has the story on this morning's front page:  The SEC has caught one of the biggest crooks in the sale of billions of dollars of fraudulent securities.  The crook?  It's the state of Illinois!  The problem?  Disclosures relating to the extent of its pension obligations.

Here is a link to the SEC release, which in turn links to the consent order. 

An SEC investigation revealed that Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan.

Good thing that the people who missed Madoff are starting to catch up to the Manhattan Contrarian in noticing the huge problems in pension disclosures in at least one state.  Perhaps they might notice the problems of California, New York and many others some time soon?  Why not -- this is free grandstanding.  Bondholders who weren't already aware of Illinois's pension problems should probably be declared too dumb to be allowed to invest.  The SEC settlement contains no penalties, of course.  Also, no admission of wrongful conduct.  Just a list of so-called "remedial measures," including such powerful remedies as "provid[ing] a hyperlink to a February 2009 COGFA monthly briefing in which COGFA provided certain negative information regarding . . . the State's pension system assets," and "commission[ing] a Pension Modernization Task force to evaluate the benefit structure, costs, and funding of the State's pension systems."  Yup, that'll work.  Meanwhile, the state legislature has met repeatedly to address the funding shortfall issue, and has very pointedly done exactly nothing about it so far.  But, in the SEC's defense, that's not their issue.

Meanwhile, in the grand Keystone Kop tradition of missing Madoff, can the SEC please explain why they haven't noticed that the Federal government's disclosures of its own pension and retiree obligations, aka Social Security and Medicare, is misleading to the tune of multiple tens of trillions of dollars?  (By contrast, the Illinois Policy Institute puts the underfunding of Illinois pensions in the range of $85 billion -- around 0.1% of the size of the Federal problem.)  As a potential investor in Treasury securities, the amount of the unfunded liability for Social Security and Medicare is number one at the top of my list of what is absolutely essential to know.  Well, of course, there is the even bigger fraud in Federal accounting, namely counting all Federal expenditures on goods, services and salaries as a 100 cent on the dollar increase in GDP.  But I guess that one doesn't go to its own solvency.