Sunday, December 19, 2010

Whitney: 50 to 100 Sizeable Municipal Bond Defaults Coming

60 Minutes does a great job of providing an overview of the current desperate financial situations of many state and local governments. After viewing this clip, you won't want to own any muni bonds.


  1. Wenzel,

    (Playing DA) but isn't the Fed printing up money to flood the economy so that a bid can be hit on muni offerings?!

  2. This video was actually pretty comprehensive, pretty open about the problems. Kind of makes you wonder what the hell happened with the Bercranke interview?

  3. In all honesty I think she was very reserved in discussing this issue. First off, if even 10 sizable muni bond offerings fail, it will put the entire muni-market into a death spiral. Yields will climb on even the safest bonds which will put an extreme amount of financial pressure on just about every municipality and will certainly push many more over the cliff.

    Without even listening to Ms. Wihtney I already know that the state and local government are headed for collapse just based on what 3 of my family members that work for local government have in retirement benefits. They are all multi-millionaires even when you take the PV of their future expected benefits. The most sickening thing about their pension plans, besides the expressiveness, is that there is no way anyone in the private sector could ever sock away enough cash tax free through any of the IRS approved retirement plans that would come close to the PV of these pensions at the date of retirement.

    Anyhow here they are assuming a payout to age 78:
    - #1 works for NJ Public School as Head Maint Guy (aka Janitor, retires age 59: $2.7m
    - #2 works for FL county police agency as patrolman no rank, retires age 50: $4.1m
    - #3 works for FL county fire rescue as LT., retires age 51: $4.7m

    Keep in mind that none of them are high level public employees so this is pretty representative of what the average person gets in their system. God only knows what the pensions look like at the federal level.

  4. RW: At what point, if ever, does The Bernank step in and purchase munis? Actually, I think it would need to be structured as a lending facility as the Fed could not buy any paper dated longer than 12 mos. without an explicit Federal guarantee.

  5. Pension payouts, what about the health benefits that are also very very generous.

    Plus assuming they die at 78 or are not then transferred to a spouse.

    Bro JD

  6. I think the initial defaults will be from local, small municipalities, where the expertise and political oversight are probably the most lax. Look for states to step in and shore up these little hiccups, especially connected small communities, because the fellows in the individual state capitols know that the fallout can easily reach innocent bystanders when markets get spooked.

    California will get bailed out somehow because it has the most Electoral votes--that just how the world works.

  7. How the states handle municipal bailouts is their business.

    But if CA defaults or needs a bailout, then it should surrender its statehood and be administered as a territory until the debt issue is resolved.