I knew about the incincerator bonds, but those were revenue bonds, these are GO’s. This is going to be a national issue. The crazy thing about this is that interest rates on bonds is supposed to be based on maturity, market interest rates and creditworthiness. Today, with rates near zero(the 2 year Treasury is something like 0.46%, the 5 year about 1.5%)investors are clamoring for tax free interest to get yield and avoid taxes. Problem is, there’s not that much yield. 5 year munis yield maybe 1.5-2.0%. 5 year NYC GO’s are at 1.5%. Investors, in their stretch for yield, have ignored risks associated with municipalities. I think this Harrisburg situation demonstrates that risk is certainly not zero. Talk about being out on the gangplank. IMO, this won’t be solved by increasing tax revenues by either raising taxes or waiting for a recovery for coffers to be replenished. aTowns, cities and states need to cut spending…and fast. For anyone owning or considering buying insured munis thinking they are safer, caveat emptor. IMO, bond insurance is a scam used to lower financing costs by issuers, not necessarily protect investors. MBIA had underwritten and insured $800 billion of bonds and had $3-4 billion in equity to pay for defaults. Nice ratio, huh? Buffett stopped insuring bonds, as he said you didn’t get enough for the risk. He also put forward a possibility. That municipalities, facing a crunch, might choose to default on bonds, and let insurers pick up the tab, the attitude being, “well, we paid the insurance, let them pay the bondholders.” FYI, you don’t get your money back right away, they pay you interest and you have to hope they’re still around til maturity. You can’t really sell the bonds, as they’d be in default. Pre-refunded and escrowed munis, backed by treasuries are as good as treasuries, but they yield 0.4% for 1 year. I’ve seen this written before, but blue chip stocks are safer, IMO, than bonds. JNJ yield 3.6% and has raised their dividend 48 years in a row. I’d rather take my chances with them, KO, WMT, XOM, than hope towns, cities and states get their act together. For close to zero yield, who needs the risk? What will be the appetite for PA bonds should Harrisburg, the freakin’ capital, defaults on bonds?
This guy’s got the right idea. And his stock is soaring. Not sure why others don’t have his courage to speak the truth. It’s like most politicians are afraid of stepping on toes. If you don’t step on any toes, you’ll end up like Harrisburg, or California, Illinois, NY.