Credit troubles atypical: Collingswood in peril
By Jane Roh
Courier-Post
Sept. 18, 2011
Collingswood’s downgrade to junk status by the ratings agency Moody’s may have raised questions about whether other New Jersey towns are in danger of seeing access to credit dry up.
Most are not.
Nine months after Wall Street analyst Meredith Whitney sparked a sell-off by predicting — in a “60 Minutes” segment — a massive crash in municipal bonds, the market is relatively stable.
“Although the economy has affected local government finances, it generally hasn’t affected them strongly enough to cause defaults,” said Mitchell Savader, CEO of Manhattan-based Savader Asset Advisors.
“We have had a negative outlook on both the local government and state sectors now for three years,” said Jack Dorer of Moody’s Investors Service. “No question there are pressures in the marketplace. But the vast majority of municipalities is holding up very well.”
US Fiscal Union Offers Lessons for Europe
online.wsj.com“Consider this hypothetical: Illinois, already paying higher interest rates than other states because of its debt load and dysfunctional politics, runs into serious trouble paying its debts. Ratings plunge; worries mount. What happens to the yield investors demand to lend to Ohio? Look at Europe, and the answer seems clear: Trouble in one place with a lot of debt pushes up borrowing rates for others with a lot of debt. But that isn’t what has happened in the U.S., according to a new International Monetary Fund working paper. Examining the ups and downs of 10-year municipal debt from 2005 through early 2011, it finds that an increase in borrowing costs in one state generally results in lower borrowing costs in others, the opposite of the spillovers so evident in Europe.”
“I am often amused by the progressive bias [in favour of] smaller [investment banking] firms [and against] megabanks. It was the good old boys at the smaller firms that JP Morgan and other banks used to gain access to local officials in [the Jefferson County, LA, billion-dollar municipal bond fraud] and other frauds, and the people at those smaller firms had already been deeply entrenched in corrupt schemes with public officials for decades. ... In their first experiment with Jefferson County, [Charles] LeCroy and Douglas MacFaddin, managing director of JP Morgan’s municipal derivatives unit, focussed their efforts on two commissioners, and mostly on Commissioner Jeff Germany. These commissioners had not been reelected and wanted to execute a $1.8 billion debt refinancing before they left office in November in order to direct payments to people who had supported their campaigns – specifically through Gardnyr Michael and ABI Capital, two local broker-dealers. ... In fact, ... these smaller firms played the megabanks off of each other, which only increased the cost of the schemes to taxpayers.”
—Bond Girl (@munilass)“Moody’s Credit Rating Service just announced the ominous trend that credit quality in the municipal bond market is falling at the fastest rate since the collapse of Lehman Brothers in 2008. Data released showed that 5.3 times as many municipal bonds were credit downgraded over the three last months than were upgraded.”
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The Municipal Bond Market Is Imploding | Before It’s News
These cities are gearing up for defaults on their muni bonds. How long until the streetlights go out and the toilets don’t flush?
Kates On Municipal Bonds
Okay, so I was partially joking when I recommended for someone to recommend municipal bonds for me to blog about. However, since it was the one and only topic requested, I will give you my knowledge on municipal bonds.
It all started when Megan brought out the book she is reading for work [she’s in training] called “Municipal Bonds.” We all laughed about how she would be reading about municipal bonds while drinking on the beach. I, however, somewhat envied her for having an advanced knowledge on these mysterious ‘municipal bonds.’
So, I finally asked her wtf a municipal bond is. Considering I have never taken a finance or business class, I really don’t know anything about bonds. And no, that’s not a good excuse for being ignorant on the topic, but at least I finally asked.
What I have to say about municipal bonds is that they are very peculiar entities. This is my summary of them: Non-profit organizations need money to operate [okay, that’s obvious], and they get donations and all that jazz, but it’s simply NOT ENOUGH to fund their ventures. So, they buy these bonds [Megan sells these bonds or something] and are able to go on with their business while paying only interest on what they’ve purchased… hoping to one day fully pay back the bonds they’ve purchased?
Did I get that right?
Well, now I really want to know more about these bonds. I think they’re pretty interesting.
So… that is all I really have to say about municipal bonds, I think. It seems like kind of the ‘dark side’ of life… or the dark side of my mind. It seems dim.
I wish municipal bonds the best of luck.
New Rule Takes on Pay-to-Play in Muni Bonds
Sunlight has long been an advocate for not only improved transparency of government institutions but also for thoughtful transparency measures that have open data standards in mind. Today we submitted a letter to the Municipal Securities Rulemaking Board (MSRB) supporting a proposed rule change that would give voters more information about who is trying to influence bond ballot issues.
“Let's use an analogy...most homes don't sell every day, or even every year. So to estimate a home value, some companies create one based on similar homes that have sold nearby...that's how it works in a large market of diverse (but not actively traded) bonds such as munis. ”
—I am not sure that real estate market pricing efficiency is the the best analog to support your point that US municipal bonds are misunderstood.
Real estate possessed unique fundamental underpinnings to its own demise (mostly vast liquid DEBT and investor support holding up prices) that when it disappeared eroded 90% of its value in 2008.
Yes, real estate market has firmed up a bit, but there are still enormous amounts of real estate that will never return to its 2006 peak value, mostly due to oversupply.
Sound familiar?
Municipalities, despite obvious risk factors like underfunded pensions and declining tax revenue, still function despite negative cash flow because of access to debt thru the bond markets. Once that appetite from wealthy individuals seeking tax-advantage income gets squeezed for safety concerns, this illiquid market will seize up and choose its own set of zombies to create.
Fixed Income municipal water bonds
I want to learn more about fixed income securities. My girlfriend works for the water quality department in my town and she studies the biological changes in water with pollution, and other stuff. She also deals with water sheds. Anyways, I want to study municipal bonds and how water risk scarcity needs to be focused on. Most municipal bonds that deal with utilities deal with water consumption and many of these bonds are rated AAA. However, they do not take into account the risk of rising consumption with population growth, global warming, and lawsuits with different states fighting for the same water source.
It will be interesting to see how my girlfriend and I team up on this project. She understands the biological, hydrological, scientific viewpoint, and I understand the investment analysis, risk management side of it. I think it will be a fun little project.
To start, I am reading the fixed income section of my CFA material ( I need to read it anyways), and I found a model of water risk management online that I will use.
This is what I do for fun..I’m such a nerd.
WATCH OUT INVESTORS--JUNK BOND RISK ON THE RISE!
Even during stable markets, high-yield (junk) bonds are considered to be speculative, high-risk investments. High-yield bonds can be volatile. After a four-month buying surge beginning in January, more than $3 billion left high-yield bond funds during the week ended May 23. Some are calling on investors seeking yield to put money into high-yield bond funds (“Is Now the Time to Buy Junk?” by Ken Levisohn, Wall Street Journal).
High-yield bonds and stocks have similar market risk and return characteristics. High-yield bond prices have a much greater correlation with the movement of stock prices than with investment grade bonds. Thus junk bonds do not add the benefit of diversification that investment grade bonds do.
Junk bonds also have credit risk - the risk that the issuer will default on its payments. Investors therefore demand higher yields than they do for investment grade bonds as compensation for the increased risk of default.
Perhaps most alarming, junk bonds are generally illiquid, meaning there is not always a ready market in which to sell them. The lower the bond’s rating, the less liquid the bond is. This illiquidity can be more pronounced in periods of market stress. Money is rapidly flowing out of high yield bond funds, which are composed of bonds rated below BBB by Standard & Poors and below Baa by Moody’s. With Europe looking shakier, investors have sought the safety of U.S. Treasuries. Others also urge caution. “It’s not the optimal time to add risk,” according to Brad Rogoff, head of credit strategy at Barclays, as a worsening of the Euro crisis could lead to more selling of junk bonds.
The most important of investors’ rights is the right to be informed! This Investors’ Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors’ rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.
AN ORACLE OF OMAHA PREDICTION COMING TRUE?
Stockton, California has filed for bankruptcy. In testimony before the U.S. Financial Crisis Inquiry Commission in June 2010, Warren Buffett, The Oracle of Omaha, predicted a “terrible problem” for municipal bonds in coming years. A portion of that prediction came true on June 28 with Stockton, California becoming the largest city ever to declare bankruptcy. On that day, the town of Stockton, CA, filed for Chapter 9 bankruptcy protection. This is not the first town to file for bankruptcy with outstanding bonds, however its aggressive attitude toward bondholders has those in the municipal bond market concerned. Warren Buffett, billionaire chairman of Berkshire Hathaway, Inc., has continued to express concerns about the number of municipal bankruptcies happening around the nation.
Kelly Nolan and Mike Cherney writing for WSJ.com point out the dangers for current bondholders. Stockton missed bond payments earlier this year and does not plan to make any further payments during its reorganization. This lack of concern for making debt payments is unusual. Cities such as Vallejo, CA and Central Falls, RI, are going through bankruptcy and have reported that they are making every effort to keep their bondholders whole. Few cities, towns, villages and counties actually file for bankruptcy as it could make it more difficult to get funding in the future. Specifically, only 51 such entities have filed since 1980 with a quarter of them since the economic recession in 2008. Stockton City Manager Bob Deis reports massive spending and staffing cuts already and claims that “further reductions to service levels would not only jeopardize the safety of residents, they also would severely limit this city’s chances for economic improvements.” While the number of municipal issuers defaulting on their bonds has fallen since 2010 according to Municipal Market Advisors, Buffett thinks that the “stigma” of bankruptcy as a deterrent is much less when sizable municipalities like Stockton, CA, thumb their nose at creditors. The stress on cities and municipalities has been strained by rising costs and dropping tax revenues. This stress has become even more acute considering that many cities and municipalities are facing serious shortfalls in funding pension obligations and declare bankruptcy when payments cannot be made. Buffet’s warnings need to be seriously heeded by investors and more care needs to be exercised in making a decision to buy municipal bonds. The days of assuming that a municipal bond investment must be okay by its very nature are gone.
The most important of investors’ rights is the right to be informed! This Investors’ Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors’ rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.
WATCH OUT UNITED STATES MUNICIPAL BOND INVESTORS--UNDERWRITERS' DUE DILIGENCE QUESTIONED!
The Securities and Exchange Commission (SEC) recently issued a Risk Alert on compliance measures to help broker-dealers fulfill their due-diligence duties when underwriting offerings of municipal securities.
The alert issued by the SEC’s Office of Compliance Inspections and Examinations (OCIE) notes that in recent years there has been significant attention focused on the financial condition of some state and local governments, and cites concerns about the extent of written documentation by broker-dealers of due diligence efforts and supervision of municipal securities offerings.
The alert includes examples of practices used by broker-dealers that may help to demonstrate due diligence and supervisory reviews. These include the use of detailed written policies and procedures, the use of commitment committees, due diligence memoranda, outlines for due diligence calls, recordkeeping checklists, and on-site examination activities. Practices such as these could help a firm show how it is meeting its obligation to perform due diligence, and to support that it has a reasonable belief as to the accuracy and completeness of the Official Statements describing the municipal bond offering.
Brokerage firms have a duty to perform due diligence on any investment prior to recommending it for sale to its clients. As concerns grow that local governments may default on their debt, brokerage firms may have to demonstrate that they performed due diligence on these municipal securities prior to recommending them to their clients.
The most important of investors’ rights is the right to be informed! This Investors’ Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors’ rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.
