Thursday, February 17, 2011

The Muni Experts Sound Like the Mortgage Experts (Before the Crash)

John Carney says the mortgage experts called John Paulson a novice who didn't understand the mortgage market, when he when short the market (When the market crashed, Paulson cashed-in to the tune of billions).

Carney says the muni experts are on the attack against those warning about the muni market along the same line the mortgage experts attacked Paulson. They are novices who don't understand the muni market, say the experts. Carney writes:
The “muni people” are pretty much united in the view that munis are safe, that talk of large losses is irresponsible and the product of novice minds looking at a market they don’t understand. After all, investment grade munis never default.

I’m worried that the same kind of tunnel vision that blinded so many of the smartest minds on Wall Street to the fragility of the mortgage market may be operating in munis.
Very possible, John. Very possible.


  1. The big question on general obligation bonds, whether unlimited tax, or limited tax varieties, is whether the courts will uphold the bond holder's rights in the event of a default.

    Non GO issues, such as revenue bonds for non-essential services, like stadiums, and other special use projects, are likely to get a haircut (more like a buzz cut) in the future.

    I believe that the great vulnerability is in the small issues of communities that have weak oversight and expertise. That's where, in my opinion, the defaults could start piling up.

    Low interest rates created by the Fed allowed the mis-appropriation of capital in municipalities, just like it did in 1-4 family housing mortgage lending.

  2. Do muni defaults hurt the big banks at all? My understanding is this is largely a retail problem. Unlike subprime, there are few if any leveraged bets on these issues. Reading between the lines of "insider" statements, such as the TBAC minutes, there seems to be consensus of a Federal/Fed backstop. What would the motivation be, though?

  3. There's a lot of institutional holdings in municipals; banks and insurance companies, as well pension plans hold these in great quantity. Yes, there is a lot being held in the retail market, as well.

    The institutional players keep a steady eye on their holdings, but the retail holders, in my opinion, could be in for a very rude awakening if they hold the wrong issue that defaults. News on these issues is often hard to come, but impossible.

    As far as backstop? I think liberals will backstop their voting constituencies--people like Sen. Dick Durbin of Illinois couldn't care less about bond holders.

  4. Looks like munis could take down AIG again. $46.6 billion portfolio. Travelers could be in trouble as well.