Tuesday, December 23, 2008

10 Municipal Bankruptcies In 2009?

It's a race. On the one hand you have the Fed pumping money into the bank system at near Zimbabwe rates to re-inflate the system, on the other had, Ben Bernanke's 2008 Summer of Monetary Stinginess is having its latest impact on municipalities.

Will Bernanke's money gusher reach the municipal sector in time? If not, it is going to be another mess.

The accountant who predicted the nation’s largest municipal bankruptcy says as many as 10 insolvencies will roil the $2.7 trillion U.S. market for state, county and city debt next year, according to Bloomberg.

John Moorlach said in 1994 that Orange County, California’s leveraged investing strategy could wreck its finances. The county went bankrupt about six months later after losing $1.6 billion.

As many as four cities in California and six others nationwide may seek court protection from creditors next year under Chapter 9 of the bankruptcy code, the section devoted to municipal governments, Moorlach said in an interview.

Moorlach said many California cities are watching Vallejo, a city of 117,000 on San Francisco Bay that filed under Chapter 9 in May. The city hopes to rewrite its labor contracts with police and firefighters.

“If Vallejo is successful in unwinding pension agreements, you could see Chapter 9 become a whole new industry,” Moorlach said.

Of course, the Fed and Treasury will in some fashion come to the rescue of any big cities that get into trouble, but it still is extremely dangerous to hold this paper. For smaller municipalities where a rescue may not occur at all, holding municipal paper is like playing Russian roulette.


  1. I don't know if Wilcox speaks for Bernanke but, according to the below, the Fed appears to have no desire to save the municipal bond market from what seems like an inevitable implosion. Of course, they could reverse this position at any time. But assuming, as Bob Murphy points out, that the administration cares about power, what would the Federal government have to gain by municipal bond failures? Could there be in the works a plan to involve the Federal government directly in state and local financing after critical failures, Lehman-style, occur? If so, that would give the administration even more policy control over many of the nation's largest cities and counties, perhaps even entire states.


  2. @ No Axe

    I think the real power axis at the core is Larry Summers and Rham Emanuel. Geithner goes along and thus is kept tightly in the loop. Bernanke needs things "explained" to him before he understands.

    Geithner is the one to watch for true insight as to what is going on.

    Control over muni markets would obviously be very powerful.