Free Republic

Kicking pension problems into the future is popular with politicians, enabling them to make promises and let voters worry later about borrowing costs. But large, unfunded state pension liabilities are a costly problem—and the cost is already reflected in current bond prices, research by Chicago Booth PhD candidate Chuck Boyer suggests. “The public pension funding crisis is not merely about future insolvency,” he writes. “Future obligations are having an effect on debt spreads right now.” To many Americans, it may seem unimaginable that states would fail to fully pay pensions promised to teachers, firefighters, and other public-service workers. It has...

The FBI conducted a search of the downtown headquarters of the Los Angeles Department of Water and Power and City Hall, officials said Monday. “There is a search taking place at the DWP building. The affidavit in support of the search warrant is under seal by the court,” said Rukelt Dalberis, an FBI spokesman in Los Angeles. Law enforcement sources said the FBI was also at Los Angeles City Hall.

A credit bubble is created when the amount of money borrowed exceeds the capacity of the borrower to pay it back. This concept is easy to understand, but the financial foundation of borrowing has been manipulated to an historic extreme by government. Not just through the national debt but through the agreements to create debt through public sector union contracts and municipal bond issuance.

The first officially recorded municipal bond was issued by the City of New York for a canal in 1812. It was a general obligation bond, meaning the city pledged every available resource – most notably, tax revenue – to repay the debt. So, in theory, unless the city lost its legal ability to levy taxes, which it never would, investors would be repaid... If Orr succeeds, look for all hell to break loose. Just like we witnessed during the real estate collapse when homeowners started walking away from their mortgage obligations without any recourse, other cash-strapped municipalities are destined to...

Meredith Whitney Is About To Seriously Double Down On Her Muni Doom Prediction Joe Weisenthal Feburary 21, 2012 Meredith Whitney first predicted widespread muni doom in late 2010, and so far that hasn't come to pass at all. Since then, her reputation has definitely taken some hits, but she's not giving up on her big call by any means. According to Kevin Roose at DealBook, Whitney will be coming out with a new book in December called: “Downgraded: Why the Next Economic Crisis Will Be Local.” The book is being put out by publishing house Portfolio. Dealbook posted this paragraph...

CORRECT: Municipal Bonds Weaken As S&P Announces Widespread Downgrades By Michael Aneiro Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--The municipal bond market weakened Tuesday after Standard and Poor's downgraded more than 11,000 public finance issues to keep them in line with its newly lowered rating on federal government debt. S&P said it had lowered to double-A plus from triple-A the ratings on certain public finance debt issues linked to the federal government, matching the downgrade it applied to U.S. government debt last Friday. While the number of issues affected is large, it covers less than 1% of the estimated...

Federal Reserve Chairman Ben Bernanke on Friday ruled out a central bank bailout of state and local governments strapped with big municipal debt burdens, saying the Fed had limited legal authority to help and little will to use that authority. "We have no expectation or intention to get involved in state and local finance," Mr. Bernanke said in testimony before the Senate Budget Committee. The states, he said later, "should not expect loans from the Fed."The $2.9 trillion municipal-bond market has been stung recently by worries that some cash-strapped cities or states won't be able to pay off or roll...

Just How Freaked Out Should You Be About A ‘Muni Meltdown’? Published: Thursday, 23 Dec 2010 | 11:31 AM ET By: Jason Farkas America is now officially worried about a municipal bond meltdown. In a piece called "Day of Reckoning," CBS 60 Minutes showcased financial analyst Meredith Whitney’s bold prediction that we will see “50 to 100 sizable [muni] defaults...more. This will amount to hundreds of billions of dollars of defaults.” It’s a frightening forecast. Another sign that the muni issue has captured America’s attention: the number of people searching for the term ‘municipal bond’ on Google has spiked in...

Muni bonds don't exactly turn heads when times are good. But lately they are getting a lot more attention than their embattled fans would like. After rising through the first 10 months of 2010, the average municipal bond fund has lost 3% in just the past month, according to TrimTabs. Some funds have lost 10% or more this fall, as the long bull market in Treasury debt has come up lame and worries about stretched state and local government budgets have started getting more attention. Muni funds have suffered outflows in five straight weeks, with $9.3 billion in investor funds...

Get out of Muni Bond Funds NowDecember 10th, 2010 By David Goldman I’ve been warning for months that a few state and municipal bankruptcies (actually, a few states and a great many city bankruptcies) will be required to slay the beast of government-union pension liabilities. The total size of the muni bond market is about $2.4 trillion. Unfunded pension liabilities (calculated with a realistic discount rate) are almost as high, according to one study. Now comes James Pethokoukis of Reuters to tell us of a “secret GOP plan” to bankrupt local governments and crush the government unions.excerpt... My best guess...

There is a fund called the PIMCO California Municipal Income Fund II symbol PCK on the New York stock exchange. In the last few days the fund has been going vertical down. Investors can’t get rid of this turkey fast enough. (SEE PICTURE TOP LEFT-DOUBLE CLICK ON CHART TO ENLARGE). “It might be argued that muni markets are merely reflecting similar declines in Treasuries (TLT). Fair enough. Bond holders, though, are probably are more interested in the fact that their bonds have declined rather than why. Warren Buffett warned back in June on the muni bond market as local and...

Faced with a $118 million budget deficit, the city of San Jose, Calif., recently decided it could no longer afford its own janitors. So the city's budget called for dropping its custodial staff and hiring outside contractors to clean its city hall and airport, saving about $4 million. To keep all its swimming pools open and staffed, the city is replacing some city workers with contractors. "These are cases where the question is being asked, 'Is this a core service at the city level?' " said Michelle McGurk, senior policy adviser to the San Jose mayor. After years of whittling...

Municipal borrowers defaulted at three times the typical rate even as the pace fell from records the past two years when Jefferson County, Alabama, and Lehman Brothers Holding Inc.’s failure sustained historic levels. Thirty-five municipal bond issues totaling $1.5 billion defaulted in the first six months of 2010, the Miami Lakes, Florida-based Distressed Debt Securities Newsletter reported in its July edition. That annualized $3 billion pace is triple the rate of $1 billion or less a year going back to 1983, Richard Lehmann, publisher of the newsletter, said in a phone interview today. The rest of the story...

Siegel: Even Muni Bonds Get Hit by Obamacare Tax Hikes Friday, May 28, 2010 08:17 AM By: Forrest Jones President Barack Obama’s healthcare reform bill may no longer grab headlines like it did since its passage, but tax hikes related to the bill are lurking, says author and University of Pennsylvania Wharton School of Business Professor Jeremy J. Siegel. “The biggest negative is the surprise imposition of a 3.8 percent Medicare tax on investment income — the first time unearned income has been subject to such a tax,” Siegel writes in his column in Kiplinger’s Personal Income. Further tax hikes...

It looked like the closest thing you could get to a sure bet — even in a city full of one-armed bandits. The state of Nevada planned to build a sleek, automated monorail that would ferry millions of tourists up and down the famed Las Vegas Strip. And they were funding it by selling more than $600 million in municipal bonds — some of them paying a hefty 7.5 percent in interest. With AAA ratings, they were the very definition of “safe” muni bonds. But something funny happened on the way to the casino. Fewer tourists came to Vegas, and...

SEC Probes Wall Street Selling of Muni Bonds: Report Friday, May 14, 2010 08:08 AM The Securities and Exchange Commission is investigating whether Wall Street banks used their own money to bet in financial markets against municipal bonds that they had sold, the Wall Street Journal reported. Citing people familiar with the matter, the newspaper reported that the regulator is examining trades of municipal credit default swaps

February 24, 2010 Muni Abuses Weigh Down States, Cities By Steven Malanga Speaking to the Wall Street Journal last week, the comptroller of Harrisburg, Pa., sounded downright glum as he explained his city's diminishing prospects of meeting a big upcoming bond payment. Harrisburg has just $1.2 million cash on hand and faces payroll costs alone of about $3 million a month. Even worse, it has about $17 million in debt payments coming due, a result of a series of "dizzying debt deals" according to a local newspaper. "We can't raise taxes; they're already very high," the comptroller explained. "If we...

Municipal bonds are usually thought to be a risk-free investment. Turns out that's not always the case. ___ Vallejo, California's bankruptcy last year represented the largest municipal default in 14 years. For 16 months, Jefferson County, Alabama has been unable to pay debts on billions of dollars in sewer bonds. Almost everywhere, tax revenues have plummeted, throwing the finances of local governments into disarray. So, are municipal defaults becoming more common? As it turns out, that question is part of the backdrop to a dispute between the Securities and Exchange Commission and local governments over regulation of the municipal bond...

State and local governments are asking Washington to give them something that banks are trying to get rid of: federal bailout money. California is asking that money from the Treasury’s TARP, the Troubled Asset Relief Program, be used to help back more than $13 billion in short-term borrowings. Members of Congress and several municipalities want bailout money to be used to cover more than $1 billion in losses from investments by municipalities in debt issued by Lehman Brothers, the investment bank that went bust. And Representative Barney Frank, chairman of the House Financial Services Committee, is drafting legislation that would...

Federal government set to backstop all 50 states. One of the most insane ideas we've heard of may soon become reality. Fox Biz is reporting that the House Financial Services Committee is set to take up legislation this week that would establish a federal backstop for all Municipal bonds and muni insurance. This would, of course, represent another massive expansion of the government's guarantees and turn all states into Fannie and Freddy. Here are the details, again per Fox Business: Create a liquidity facility through the Federal Reserve to purchase municipal bonds, much like what the Federal Reserve does with...