Just How Freaked Out Should You Be About A ‘Muni Meltdown’?

CNBC ^ | 12/23/10 | Jason Farkas

[TigerLikesRooster]

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 the last week.

Even Goldman Sachs [GS 167.60 -2.00 (-1.18%) ] and Citigroup [C 4.68 -0.05 (-1.06%) ] analysts rushed out notes in the days following the broadcast, assessing the likelihood of Whitney’s doomsday scenario.

“The public debate on the subject of municipal credit is terrific and Whitney has helped to energize it even more,” says Ben Thompson, who oversees $7 billion in tax-exempt debt for Samson Capital.

Not one to ignore the structural problems in the municipal market, Ben was early to alert CNBC's "Strategy Session" to these issues back in June. But he’s quick to question the scope of Whitney’s call: “I disagree with the conclusion that the market is facing imminent defaults of the magnitude she described.”

So should you be freaked out?

[devane617]

Muni’s are NO LONGER a safe investment. You need to rethink you comfort level for loses.

[RegulatorCountry]

I’d take a long, hard look at which municipal bonds are contained within any fund, seriously. Jefferson County, Alabama is something to look at. Bond insurers themselves have not been immune to financial stress due to mortgage-related securities. Syncora Guarantee Inc. and Financial Guaranty Insurance Co., two of the major bond insurors, had their credit ratings reduced in 2008. Bloomberg has an informative article on this, I’d post an excerpt but I believe this is not permitted. It should come up easily on a search engine.

[Oatka]

Legitimate bond funds are insured.....that is why they are so safe.

I know and understand, but they said the same about mortgage bonds. I'm just wondering at what point the defaults impact the insurance companies. With apologies to the Romans, "Who insures the insurers?" (O Geez, Bernacke comes to mind. :-) )

[Presbyterian Reporter]

“”Legitimate bond funds are insured.....that is why they are so safe.””

_____

1. Bond funds are not insured. Only the municipal bonds that make up the funds are for the most part insured.

2. Municipal bonds formerly were safe because the bonds were insured and the issuer was financially prudent. Today the Bond Insurance Companies have terrible balance sheets. The Bond Insurance Companies got themselves caught up in Mortgage Backed Securities and Collatorized Debt Obligations and lost their proverbial shirt. To further compound the problem the municipalities have been overspending and their balance sheets are terrible.

So today there are lot more risks with Municipal Bonds, but if you do your research good bonds can be found.

[AFret.]

Please elaborate...

I’m always willing to learn.

[devane617]

#22, 23 and 24 stated the nature of the problems well. Last Sunday’s “60 Minutes” had a very well done story on Muni’s that made news all week. As hard as a few tried to refute the story, in the end the major points were left unanswered. Good luck.

[AFret.]

I thank you for your reply.

I don’t watch 60 Minutes, but I will do some research and re-visit with my Broker after the Holidays.

Good luck to us all...

[devane617]

60 Full Segment

This story aired last Sunday night and is worth a few minutes. I found the story to be surprisingly unbiased. Gov Christie of NJ puts the problems in plain-speak....

[preacher]

"One of our oldest SUPREME COURT PRECEDENTS, with that in Mind is not EVERY PUBLIC PENSION CONTRACT and PUBLIC DEBT ISSUANCE NULL AND VOID at the End of the Legislative term that entered into said agreement???"

The problem with muni bonds will not be solved until public worker's union contracts are voided.

[Presbyterian Reporter]

ObamaCare heaped additional problems on state and local governments. Local governments operate many medical facilities and ObamaCare imposed new rules on these facilities that cost money.

Consequently, the price of the medical center municipal bonds have dropped by 15 to 20% in the past few months.

AA rated medical center municipal bonds now yield 5.5 to 5.75%.

[The Comedian]

CNBC-cheerleading-the-lost-game ping.

"Economic Holocaust" ping.

Increasing volume ping list watching the slow motion Economic Holocaust.

FReepmail me if you want on or off
The Comedian's "Economic Holocaust" ping list...

Frowning takes 68 muscles.
Smiling takes 6.
Pulling this trigger takes 2.
I'm lazy.

[Quix]

HMMMMMMMMMMMM

[PapaBear3625]

Bottom line...In order to borrow our money, the municipalities must purchase and maintain insurance on the bonds they are selling. That is why they are so safe.

They are only as safe as the insurance they bought. Will the insurance entity be able to cover multiple defaults?

[DeaconBenjamin]

Muni Bonds are the second safest investment in the country,the only safer investment is Government bonds”.

LOL. Until they aren't. Do you know what a black swan is?

Or, to echo the comment above, how many municipal bonds have to fail before their insurance fails as well?

[DeaconBenjamin]

Here's a list of 16 US candidates from the Financial Post of Canada: 16 U.S. cities facing bankruptcy if they don't make deep cuts

[AFret.]

Just watched the segment..Thank you very much for forwarding.

I will place a call to my broker on Monday.

Thanks and Merry Christmas

[BooBoo1000]

Enough already, just get through the New Year, then let the sorry bunch sink. I have had enough of this gloom and doom, let's get on with it so that we can pick up the pieces and start over.The first thing we have to do is clean out Washington and the inbeded professional congress.

[HardStarboard]

>>>Do you know what a black swan is? <<<

Bingo....I think he's airborne and headed our way!

[HardStarboard]

>>>Do you know what a black swan is? <<<

Bingo....I think he's airborne and headed our way!

[eyeamok]

My point exactly, ALL CONTRACTS SHALL EXPIRE at the End of the legislative term that authorized them. If we coupled that with :
All Government at all Levels Shall use The GAAP Standards.

Would end this crap overnight