Monday, June 18, 2012

The Mad Adventures of Gasbag Gasparino

Charlie Gasparino, who early last year let out an unrelenting barrage against Meredith Whitney for her warnings on the municipal bond market, is out warning, get this, about municipal bankruptcies. Writes The Gas (My bold):
...a “strictly confidential” report JP Morgan issued last year...describes in straightforward, frightening detail how underfunded pensions are huge ticking timebombs for many of the nation’s big cities and states...JP Morgan itself kept the report’s findings a secret except for a few big clients, mostly hedge funds and large institutional investors, who got the inside tip on which states and cities are most likely to default on their debt as their pension liabilities fester.
Yes: Default is a very real possibility, because the solutions are far from easy.

Got that? While Whitney was heroically warning publicly last year about the dangers in the municipal market and Gasparino was attacking her from every angle possible, JPMorgan Chase was secretly warning their top clients about the same dangers. Here's more from The Gas (My bold):
Nationwide, the actual size of unfunded public pension liabilities is four times larger than the $900-plus billion that officials are ’fessing up to. That’s right, the bank sees a $3.9 trillion hole; to plug that, states and cities will need large tax hikes, massive budget cuts or both. Plus, public-sector unions will have to accept smaller retirement packages, and later retirement ages, to keep the pension systems going.

Without these steps, states and cities with the biggest holes face possible insolvency and default, though the bank believes the risk of default “is greater for municipalities than for states.

Many of the places facing the biggest pension liabilities are right here in the Northeast, where big government rules and public unions are such a potent political force that officeholders dish out gold-plated benefits.

But the classic big-government answer, taxing the rich, won’t solve this problem. Nor can these municipalites simply count on high returns on investments bailing them out, the report warned, since markets don’t always go up.

In New York, for example, JP Morgan said state officials would have to immediately cut spending by 12.3 percent or raise taxes on everyone by 7.4 percent. And they’d need to make these tax hikes and budget cuts permanent for the next two decades to fully fund public-employee pensions.

New Jersey faces an even bigger hole. Even after Christie’s reforms, it would still have to cut spending 30.8 percent or raise taxes another 17.2 percent, keeping them in place for two decades, to solve the problem.
At most, Gasparino may have Whitney on her timing, but he really owes Whitney an apology for all the gas he let out last year. Whitney boldly stated what Gasparino is now reporting JPMorgan Chase, a top muni bond issuer, was saying only privately to select clients.

As I reported at the time of The Gas going off, a senior official in a previous administration, who knows a thing or two about government spending and budgets, is even more concerned than Whitney about how bad the crisis is likely to get. And although Gasparino's focus is on the northeast, Illinois and California appear to be in greater trouble, with Illinois hitting the crisis phase first. We are perhaps still a year or two away, and serious near hyper-inflation by Bernanke can quell the problem the debt problem, but  it's likely that we are headed for major municipal bond defaults or price inflation so strong that the buying power of muni bonds held will be cut by between 30% and 50%.

Bottom line: Stay away from municipal bonds, they are not going to ring a bell when the crisis starts and the bonds start to dive. It is going to be very ugly and financially damaging for those holding muni bonds.


  1. So, question.... What do the ramifications for such default look like? Does it mean that cities tax to the moon to try to recoup or send out their police to ticket locals to the high heavens? I mean if a city goes bankrupt, will that mean destruction of real estate values? I guess each scenario would be based on the amount of debt. Thanks.

    1. I guess Detroit is the canary in the mineshaft.

      I think we'll see consolidation of munis into county scale and then maybe a monolithic state scale, and then...???

      This to spread the pain to the 'burbs. Democracy in action. Most votes are in the cities, so they vote themselves bigger and bigger chunks of the ex-urban taxpayer's remaining funds.

      Gonna end badly...

    2. That's what "Fast Eddie" Rendell tried to do when he was in office. He wanted the surrounding counties to pay taxes to Philadelphia.