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Thread: What happens to your municipal bonds when the muni does't exist anymore?

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    God/dess Deogol's Avatar
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    Default What happens to your municipal bonds when the muni does't exist anymore?

    Might be an interesting read about what is happening in California at least:



    A side note: unions have revived legislation in that seeks to prevent cash-strapped cities from declaring bankruptcy (Municipalities would have to get permission from a labor-dominated commission first). The consequence of that legislation, were it to pass, might well be to promote more disincorporations -- that is, the shutting down of cities -- since bankruptcy would be all but off the table.

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    Banned Melonie's Avatar
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    Default Re: What happens to your municipal bonds when the muni does't exist anymore?

    ^^^ well if the individual bonds purchased by a 'rich' individual investor are insured by AIG or another underwriter, then the muni bond owner gets paid in full and AIG goes back to Washington for more US taxpayer bailout money or eventually goes bankrupt. If the individual bonds are not insured ( as is usually the case with muni bond mutual funds which seek maximum interest earnings ), then the bond owner / mutual fund becomes yet one more creditor lining up to try and collect 80-70-50 cents on the dollar of what they are 'owed'.


    ... and speak of the Devil ...

    (snip)"Pennsylvania's capital of Harrisburg said it will skip a $3.29 million municipal-bond payment due in two weeks, marking the second-largest general-obligation municipal-bond default this year.

    The city's inability to make the payment, which is expected to be covered by its bond insurer, may feed worries about parts of the $2.8 trillion municipal-bond market, particularly bonds issued by smaller entities that may have fewer resources than states or larger governments.

    Paying bondholders is typically a top priority for governments, which want to ensure investors will lend to them the next time they seek to borrow.

    But sharply lower tax revenues ..."(snip)

    from


    Obviously this is an increasingly bad time to be in the muni bond insurance business !!! And like the pre-AIG bailout situation, the serious question will eventually turn out to be 'what happens when claims against the insurer exceeds the insurer's assets' such that the investors who 'thought' they had insurance against default suddenly face the possibility of eating crushing losses ?

    If the AIG bailout scenario is replayed with muni bond insurers, this will constitute a de-facto US federal taxpayer bailout of individual bankrupt state and city municipal debt repayments ( but without the political difficulties of actually calling it as such ). Or if a Fannie / Freddie bailout scenario is followed, the US federal treasury could insert itself as the 'insurer'. Either way, since money is always fungible, this would amount to federal taxes collected from residents of fiscally responsible states being transferred to help pay for continued bloated state and local spending by fiscally irresponsible states and localities ! And of course this would also 'bail out' ( i.e. prevent losses on principal and interest payments ) the rich owners of high interest rate muni bonds issued by those fiscally irresponsible states and localities at the expense of middle class taxpayers.

    ~
    Last edited by Melonie; 09-02-2010 at 03:54 AM.

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