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Thread: Municipals to Default ... beginning with California ( updated by 'no-bid' situation )

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    Banned Melonie's Avatar
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    Default Municipals to Default ... beginning with California ( updated by 'no-bid' situation )

    first from Meredith Whitney ...

    (snip)"Meredith Whitney Advisory Group is now predicting dramatic declines in US home prices, large layoffs at US banks and widespread defaults in the municipal bond market. As concerns munis, people, she says, will not want to own this asset class after the shit hits the fan. The rating agencies have helped generate a false sense of security about the tax-exempt market. States will focus on their own survival first, leaving local governments to fend for themselves. Housing market will remain disrupted, banks cannot do well under this scenario. Eighty thousand layoffs in the US due to fallout in housing."(snip)

    from

    (snip)"CALIFORNIA WILL DEFAULT ON ITS DEBT, Says Chris Whalen

    Chris Whalen on TechTicker today. He says there's no bailout coming for California--or, for that matter, any of the other bankrupt states. And that means big losses for muni-bond holders...

    You might think a government bailout is the solution that awaits California, but this time that may not happen, says Chris Whalen. Whalen thinks that California will default on its debt, thereby hammering all the pension funds and other investors who have loaded up on apparently safe state bonds.

    The state won't immediately default, Whalen says. It will start by issuing the same sort of IOUs that it issued to by itself time during its budget crisis last year. But, eventually, the debts will have to be restructured, and this will result in those who own California's bonds receiving less than 100 cents on the dollar.

    California won’t get a bailout because the Republicans now control Congress, Whalen says. Also, if California gets bailed out, dozens of other states will immediately line up with their hands out. The public is fed up with bailouts, Whalen says--and eventually, the country will be forced to face up to its bad debts and write them off. "(snip)

    from





    'Official' fears that tax free muni bonds ( and thus muni bond funds ) are facing a serious risk of default by the issuing state are really causing a stir ( and a selloff ) among muni bond investors. In case you haven't been following muni bond discussions, in general, there are two major types of muni bond buyers. The first are state pension plans that invest in these bonds by tacit agreement with the states ( i.e. states 'borrow' the pension money of state workers in order to pay the salaries of those same state workers, with a future promise of repaying the pension fund with interest ). The second are high earning residents of those high tax states ... who can afford the $50k-$100k price tag of these bonds, and for whom the tax exempt interest earnings are a way to legally avoid high federal and state tax rates on ordinary income and ordinary investment instruments.

    For the first time, the possibility of states defaulting on muni bond interest payments and principal repayments is being openly discussed. In the absence of a federal bailout ( which is said to be unlikely for reasons discussed by the author above ), this means that the uber-rich residents of high tax rate states may be facing actual loss of principal.

    Recent selloffs of muni bonds to avoid additional future losses also explains the otherwise inexplicable recent rise in the US dollar WITHOUT a matching rise in the US stock markets.

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    Default Re: Municipals to Default ... beginning with California

    For the most part, I avoid municipal and state bonds. There is way too much risk for the return. The exception being revenue bonds. Those, I will take a careful look at and if the revenue stream is strong and long, I can be tempted. Corporate bonds sometimes look good, but I prefer equities. Again, I look very closely at the company to see if:
    a. the company can clearly articulate their business plan,
    b. I can understand exactly how they make their money, and
    c. if their business is strong.

    HTH
    Z

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    Default Re: Municipals to Default ... beginning with California

    ... investors running for the exits ?

    (snip)Munis Are The First Official Burning Theater: "There Is An Avalanche Of Bid-Wanteds" As Nobody Can "Accomodate This Much Sell-Side Pressure"

    by Tyler Durden on 12/15/2010

    Over the past year, there have been many references to panicked sellers behaving like people in a burning theater. May 6 was the closest we got so far in 2010. Today we get our second confirmed spotting. Advice to parents: do not let your kids read this if your last name if Gross and their first is William: "Bondholders sought buyers for $1.4 billion in debt yesterday, the most since June 15, 2006, according to a Bloomberg bids-wanted index. “Nobody’s bidding,” Tony Shields, a principal in the public-finance department at Williams Capital Group LP in New York, said in an e-mail. There’s “an avalanche of bid-wanteds, and there is just not enough liquidity to accommodate this much sell-side pressure.” There is another words for this condition. Bidless.

    Per Bloomberg:

    Municipal-bond yields jumped at almost every maturity, except rates on 1- and 2-year debt, which fell 4 basis points and 2 basis points, respectively, BVAL benchmark indexes show. Tax-exempts coming due in 25 years rose for a sixth straight day, climbing 14 basis points to 4.72 percent yesterday, the highest since Aug. 12, 2009.

    Amid the rising yields, New York City cut today’s tax-exempt offering by two-thirds to $100 million citing “volatile market conditions,” the Office of Management and Budget said in a press release yesterday.


    But, but, the market just hit a two year high for god's sake!!?? Are you telling us it is all a scam???

    Long-term rates may increase more than 50 basis points next year if the Build America program isn’t renewed, according to a research note by analysts led by John Hallacy, manager of municipal research at Bank of America Merrill Lynch in New York.

    The subsidy was left out of an agreement President Barack Obama struck with Republicans, some of whom have been critical of the program. While in the minority, the party has enough power to stall the legislation. U.S. Senator Ron Wyden, a Democrat from Oregon, who previously led an unsuccessful bid to extend the program, offered an amendment this week to include it in the tax bill.


    Yeah, yeah: cut to the good part:

    “Look at the yields; there’s not a lot of demand right now,” he said. “Eventually the yield curve is so steep, you’re getting 5 percent yields. Empirically that’s a pretty attractive level.”

    The reduced demand, coupled with mutual-fund redemptions and rising Treasury yields has helped create a “perfect storm” for the tax-exempt selloff, Shields said.


    Ah... bidless, and perfect storm. Two terms we haven't heard in the same article since late 2008.

    There are only two solutions now: either the SEC institutes circuit breakers in muni trading (snicker), or America lets GETCO loose to be a DMM in muni land. Of course, that may mean that the world's busiest HFT firm, may finally let GM drop below $33. Which, in turn, may make all the lemmings who bought up the world's most ridiculously overpriced IPO, realize they are staring at one very big, and very hot potato in their retail accounts.(snip)

    from


    There are lots of important points to be gleaned from Tyler Durden's comments ...

    - sell pressure on muni bonds drives down their valuation, but reciprocally drives up the effective interest rate on existing bonds ... interest rates which must be matched or exceeded by newly printed bonds if the states and municipalities have any hope of selling them

    - states with huge deficits like CA, IL, NY, NJ etc. already have billions of dollars of existing bonds outstanding, but need to issue even more new muni bonds if they want to raise enough cash to keep paying teachers, cops, medicaid, food stamps etc.

    - however, if the interest rates necessary to sell new muni bonds now launch from 2-3-4% to 6-8-10%, a huge percentage of next year's state tax revenues will have to be directed towards paying higher muni bond interest rates instead of paying teachers, cops, medicaid, food stamps etc. If this is to be avoided, HUGE increases in state tax rates will be necessary !

    - if the political gulf between state spending cuts and state tax increases cannot be bridged ( which is probably the case ), these states will have no choice but to default on their muni bond repayments.

    - the number one insurer against muni bond defaults, AMBAC, recently filed for bankruptcy. Thus if ( more likely when ) muni bond defaults do occur, the bond owners are going to take a huge 'haircut'. This will piss off some very influential people, since tax free muni bonds are one of the main vehicles by which the rich legally avoid paying high tax rates.

    - right now many of those rich muni bond owners are trying to sell out ... but with the 'news on the street' already, not only are prices dropping but some 'no-bid' situations are starting to arise. This means that the current owners of existing muni bonds are 'trapped in the proverbial burning theatre' and cannot reach an exit !

    - similarly, as the article mentions, states are already unable to sell as many newly issued muni bonds as they need to in order to meet current cash flow demands (i.e. to keep sending out gov't worker paychecks and social welfare benefit checks ). State treasurers are thus AGAIN starting to resort to sleight of hand ( borrowing from state pension funds, paying vendors / contractors with IOU's instead of dollars etc.), which only intensifies future state economic problems.

    - in terms of future outlook, current developments will already make it unaffordable if not downright impossible for heavily indebted states to raise additional cash to meet ongoing gov't employee paychecks, social welfare benefit checks etc. in 2011. This will undoubtedly result in a call for draconian state tax increases, for REAL cuts in state social welfare benefit payments, etc. On another level, this will also precipitate urgent state calls for a federal ( taxpayer ) bailout ... which given the recent election results they are unlikely to receive. Thus state muni bond defaults would be all but assured, along with the states actually filing for bankruptcy.

    - in terms of a probable future state economic scenario, if the rich are losing lots of money on their previous muni bond investments, and if the same rich are facing major state tax rate increases ( along with middle class state residents also facing major state tax rate increases ), economic activity i.e. consumer spending levels in that state is likely to fall off a cliff. This is obviously NOT a good situation for exotic dancers who are dependent on those consumer spending levels in order to earn a living !

    ~
    Last edited by Melonie; 12-16-2010 at 04:38 AM.

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