Remember: Legal Does Not Always Equal Ethical

According to Don Van Natta Jr.'s article in Wednesday's New York Times, the investment bank Morgan Keegan found a particularly effective and profitable way to market complex municipal bonds to small towns in Tennessee: play for both sides.

Van Natta reported that "The municipal bond marketplace was so lightly regulated in Tennessee Morgan Keegan was able to dominate almost every phase of the business."

The mayor of Lewisburg, Tenn., where bond payments recently quadrupled, is quoted as saying, "We're little, and we depend on people wiser than us in financial ways to keep us informed."

Unfortunately, too many players on Wall Street seem to have read "little" as "easy to fleece". And sadly, if may not be that Morgan Keegan has done anything illegal. Van Natta noted that representatives of the bank said that they had "saved cities and counties money for years by delivering lower interest rates, and that the economic decline that created the turmoil in the bond market was beyond their control." That's probably true. But I'll also bet that they never pointed out the levels of risk that towns like Lewisburg were taking on. Municipal bonds have traditionally been a virtually risk-free way to invest money, and they were also a virtually risk-free way to raise money. Not any more.