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Harbinger Of Muni Bloodbath: Vallejo Offers Unsecured Creditors 5 - 20 Cent Recovery

Tyler Durden's picture


But, but, munis always pay back almost 100 cents on the dollar, even in bankruptcy, right? Wrong. Bankrupt Vallejo just filed a POR to pay back unsecured creditors between 5 and 20 cents. "The city regrets that it cannot pay a higher percentage,” Vallejo officials said in the court filings. “The city lacks the revenues to do so while maintaining an adequate level of municipal services, such as the provision of fire and police protection and the repairing of the city’s streets." Just wait for the reaction when holders of unsecured debt all those other (hundreds of) insolvent cities, towns, and states realize that a 5 cent recovery is all too possible...

And now for the bad news, from Bond Buyer:

Unsecured creditors will receive 5 cents to 20 cents on the dollar for their claims under a reorganization plan Vallejo, Calif., filed Tuesday in federal court.

The plan to exit bankruptcy outlines the reorganization of debt the city owes its largest creditors, Union Bank and National Public Finance Guarantee. It also sets aside a pool of $6 million to pay unsecured creditors about 5% to 20% of their claims over two years, according to court documents filed in U.S. Bankruptcy Court for the Eastern District in Sacramento.

The formal legal plan is based on a five-year road map City Council members approved at the end of November, tackling $195 million in unfunded city pension obligations, cutting payments for retiree health care, reducing pension benefits for new employees, raising pension contributions for current workers, and creating a rainy-day fund.

Union Bank, the largest creditor, is owed $50 million after holding letters of credit on four series of defaulted COPs. The filing indicates Union Bank will get a new “lease-leaseback” obligation in exchange for canceling the COP series. It will also get $6 million of unspent proceeds from the COPs held under trust agreements.

Union Bank is slated to get 40% less than what it would have received from the original COP scheduled payments, according to the Vallejo filing.

Vallejo’s exit strategy includes restructuring the debt owed to unsecured creditors, many of which are employees and retirees, by creating a $6 million pool of cash that will be paid out over two years. They will still be able to pursue one of the city’s insurance pools to settle the liabilities, according to the documents.

Vallejo is certainly not the last to file a plan of reorg that attributes its GUCs nuisance value. We wonder when these same GUCs realize they are nothing but a nuisance: today the MUB actually closed up.

h/t Bruce Krasting


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Wed, 01/19/2011 - 17:14 | 888233 Cleanclog
Cleanclog's picture

Tyler - For the headline, it is spelled Vallejo.


Wed, 01/19/2011 - 17:17 | 888245 faustian bargain
faustian bargain's picture

they had to sell one of the extra L's.

Wed, 01/19/2011 - 17:29 | 888305 66Sexy
66Sexy's picture


Wed, 01/19/2011 - 22:37 | 889103 Thomas
Thomas's picture


Thu, 01/20/2011 - 01:23 | 889287 Malcolm Tucker
Malcolm Tucker's picture

JP Morgan : King of the Food Stamps, they are the market leader in processing for the food stamp program!

Video of a bloomberg interview with the guy who heads up that division.

You really can't make this up.


Thu, 01/20/2011 - 01:57 | 889319 cocoablini
cocoablini's picture

Because food stamps buy "food" and as such is "money."
Food stamps ,a) keeps the masses fed,b) supports large corporation like Walmart and Coca-cola, c)helps the banks control money supply in all its forms. Yes, stamps are welfare fiat currency.
The banks are truly meshed with the politicians and it will take decades to unwind and decouple these 2 horrific entities from power.
JP can game the food stamp business, and help its buddies. If you haven't heard the "poor" can buy soda and candy with food stamps to feed their "starving" but if you want organic produce, well you are yuppie scum. You will have to settle for GMO poison instead. Snackwells, coke, capt crunch etc. Then the "poor advocates" who are just lobbyists for Pepsico and Nabisco say to force people to eat healthy is " scapegoating the poor."
Look it up- its true. Total corporate kleptocratic bullshit

Thu, 01/20/2011 - 00:46 | 889252 bania
bania's picture

More like #1, "high and tight"

Wed, 01/19/2011 - 17:55 | 888433 Sudden Debt
Wed, 01/19/2011 - 18:35 | 888575 Mudflap
Mudflap's picture

Everybody was really upset when Arnie threatened to tax golf to pay for the CA deficit.  Much easier to sell the 'l' and keep on stroking.

I wonder if Bernie thinks POMO is a 'gradual' approach to the problem at hand circa one of his early (2004) speeches at the central bank? (used miniature golf analogy) ...

“Imagine that you are playing in a miniature golf tournament and are leading on the final hole. You expect to win the tournament so long as you can finish the hole in a moderate number of strokes. However, for reasons I won’t try to explain, you find yourself playing with an unfamiliar putter and hence are uncertain about how far a stroke of given force will send the ball. How should you play to maximize your chances of winning the tournament?

“Some reflection should convince you that the best strategy in this situation is to be conservative. In particular, your uncertainty about the response of the ball to your putter implies that you should strike the ball less firmly than you would if you knew precisely how the ball would react to the unfamiliar putter. This conservative approach may well lead your first shot to lie short of the hole. However, this cost is offset by the important benefit of guarding against the risk that the putter is livelier than you expect, so lively that your normal stroke could send the ball well past the cup. Since you expect to win the tournament if you avoid a disastrously bad shot, you approach the hole in a series of short putts (what golf aficionados tell me are called lagged putts). Gradualism in action!”


The alternative to gradualism, he said at the time, would be a “cold turkey” approach.  But that “carries the risk that policymakers will take strong action in response to information that may later be revealed to have been seriously inaccurate,” Bernanke said.

Source link:

He oviously opted for the 'cold turkey' approach...

Wed, 01/19/2011 - 18:41 | 888596 mt paul
mt paul's picture

golf tax....

per stroke over par ..

Thu, 01/20/2011 - 07:49 | 889476 nedwardkelly
nedwardkelly's picture

Great. Just what I needed, another scary swing thought.

Wed, 01/19/2011 - 21:39 | 888948 pyrometer
pyrometer's picture

It's not.  Vallejo's violent crime rate has always been high, it's going up and it's   infrastructure is crumbling.

Wed, 01/19/2011 - 23:25 | 889174 Lord Koos
Lord Koos's picture

Yep, I've been through there a few times over the years, it's a pretty funky town.

Thu, 01/20/2011 - 00:43 | 889248 QQQBall
QQQBall's picture

No doubt.... The bankrupt city named _____ seems like a nice place to live... what?

Wed, 01/19/2011 - 22:05 | 889035 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

they had to sell one of the extra L's.


Wed, 01/19/2011 - 17:20 | 888257 myTPisUSD
myTPisUSD's picture

or Valley Joe if you're trying to get hyphy with it

Wed, 01/19/2011 - 17:23 | 888277 faustian bargain
faustian bargain's picture

lol, 'hyphy', i haven't seen that term bandied about in a while.

Wed, 01/19/2011 - 17:30 | 888316 myTPisUSD
myTPisUSD's picture

Wasn't Mac Dre throwin jail for "conspiracy to rob a bank"? He shoulda taken tips from Timmah and the Bernank on how its done en masse of the people

Wed, 01/19/2011 - 17:24 | 888287 Cleanclog
Cleanclog's picture

Hilarious!  And so close to Hyphy Oakland too.

Wed, 01/19/2011 - 17:53 | 888419 Ras Bongo
Ras Bongo's picture

Or Valley Hoe


Wed, 01/19/2011 - 19:45 | 888770 andybev01
andybev01's picture

Duped again.

Wed, 01/19/2011 - 21:50 | 888972 Problem Is
Problem Is's picture

"Tyler - For the headline, it is spelled Vallejo."

And It's Pronounced: Val-E-HO
Bankrupt or not --- It's a dump... Armpit of the north bay...

Wed, 01/19/2011 - 22:52 | 889124 Misstrial
Misstrial's picture

US Con. George Miller's (D) District.

He is one of the power elites who wanted water pumps shut off for the western Central Valley farms. Seventy thousand people lost their jobs in ag. 

Recipient of contributions from SF environmental groups and labor unions. 


Thu, 01/20/2011 - 00:28 | 889236 TruthInSunshine
TruthInSunshine's picture

You can't get blood from a Vallejo, bandejo.

Wed, 01/19/2011 - 17:17 | 888248 EscapeKey
EscapeKey's picture

Given the amount of analysts practically falling over themselves in order to inform the sophisticated investors how wrong Meredith Whitney is, you knew it was coming.

Wed, 01/19/2011 - 22:45 | 889066 kujo
kujo's picture

Everybody knew it was coming. This is a manufactured crisis in the muni market, I think to chase the retail investor into equities. Dust off Meridith Whitney, a banking analyst, and throw in Jamie Dimon and whip up the MSM, you have a nice crisis. The retail muni buyer is about to panic and be fleeced.

Wed, 01/19/2011 - 23:00 | 889143 Arch Duke Ferdinand
Arch Duke Ferdinand's picture

Prescient article on how the Dollar could Rise 50% from here?...

hrh ADF

Thu, 01/20/2011 - 02:28 | 889340 Founders Keeper
Founders Keeper's picture

[Given the amount of analysts practically falling over themselves in order to inform the sophisticated investors how wrong Meredith Whitney is, you knew it was coming.]---EscapeKey

Agreed. Thanks for your post.


Wed, 01/19/2011 - 17:19 | 888254 Ancona
Ancona's picture

And so it starts. Let's see how long it takes for investors to start bailing out en masse.

Wed, 01/19/2011 - 17:25 | 888289 Quantum Nucleonics
Quantum Nucleonics's picture

They've been bailing out for weeks, if you look at the fund flow reports.  There are now at least a couple funds shopping multi-billion dollar sell lists.

Wed, 01/19/2011 - 17:34 | 888337 Strider52
Strider52's picture

Wow, pretty soon there will be nothing left to invest in except paper ETF's and metals-in-hand. When all of the metal is gone, invest in canned food, bottled water, guns & ammo. When those are all gone, die.

Wed, 01/19/2011 - 17:43 | 888385 topcallingtroll
topcallingtroll's picture

There is a better option. Its time to organize for mostly peaceful change.

Wed, 01/19/2011 - 21:59 | 889008 UncleFester
UncleFester's picture

I'm calling a top on peace.  Yep, looks like it'll roll over in 2011.

Wed, 01/19/2011 - 22:55 | 889140 Joe Davola
Joe Davola's picture

large unemployment rolls = cannon fodder

Thu, 01/20/2011 - 00:43 | 889247 Terminus C
Terminus C's picture

Herein lies the long term goal of the U.S. government.

Thu, 01/20/2011 - 02:06 | 889325 faustian bargain
faustian bargain's picture

Be All That You Can Be!

Wed, 01/19/2011 - 17:21 | 888262 DonnieD
DonnieD's picture

Bulldoze it and turn it into a Winery. I'll buy a case of 2012 Cabernet.

Wed, 01/19/2011 - 17:26 | 888294 SheepDog-One
SheepDog-One's picture

That will just be a bottle filled with blood.

Wed, 01/19/2011 - 17:33 | 888328 andybev01
andybev01's picture

6-Flags, lowered to half mast.

Wed, 01/19/2011 - 21:53 | 888989 Freewheelin Franklin
Freewheelin Franklin's picture

Liquidity injection?

Wed, 01/19/2011 - 17:21 | 888264 sodbuster
sodbuster's picture

>Just wait for the reaction when holders of unsecured debt all those other (hundreds of) insolvent cities, towns, and states realize that a 5 cent recovery is all too possible...<


Just wait for the reaction of all the other cities, towns, and states, when they realize it is possible to get out of THEIR unsecured debt for 5 to 20 percent!! Happy Days!!



Wed, 01/19/2011 - 17:33 | 888331 andybev01
andybev01's picture


Wed, 01/19/2011 - 17:34 | 888336 SheepDog-One
SheepDog-One's picture

Yea maybe, but then what?

Wed, 01/19/2011 - 17:50 | 888410 Pladizow
Pladizow's picture


Wed, 01/19/2011 - 18:22 | 888519 chet
chet's picture

QE3.  All your munis are belong to the Fed.

Wed, 01/19/2011 - 17:45 | 888395 gorillaonyourback
gorillaonyourback's picture

very good point, if you look at 1 percent own 88 percent of wealth and 5 percent own 93 percent.  i think the numbers r ok.  fuck em all the cities and states should go bankrupt


Thu, 01/20/2011 - 01:32 | 889290 johnnynaps
johnnynaps's picture

Which means it should be 88-93% "their" fault when TSHTF!

Wed, 01/19/2011 - 17:22 | 888268 irishlink
irishlink's picture

OMG. We will be solvent here in Europe if we pull off a haircut like that . What could we name it? A 23?

Wed, 01/19/2011 - 20:40 | 888847 Rainman
Rainman's picture

No 5-cent haircuts for you, your hair is much too long. Double price.

Wed, 01/19/2011 - 17:23 | 888274 Quantum Nucleonics
Quantum Nucleonics's picture

Hey, those public employees gotta keep their $200K salaries and golden pensions.  Easier to shank the faceless muni bond holders then go up against the public employee unions.

Wed, 01/19/2011 - 17:45 | 888397 Bastiat
Bastiat's picture

I believe Calpers (the holder of the union accts) is an unsecured creditor

Wed, 01/19/2011 - 18:03 | 888466 Sean7k
Sean7k's picture

Calpers funding is guaranteed by the state general fund.

Wed, 01/19/2011 - 18:18 | 888512 Bastiat
Bastiat's picture

Why is Calpers in the Bankrupcy, then?  The retirement accounts for Vallejo are at Calpers--Calpers has a contract with Vallejo regarding the funding of the retirement accounts.  I am saying that with respect to that contract, Calpers is unsecured.  Whether the State is backstopping every municipal pension plan, as you imply, is a different matter.  .

Wed, 01/19/2011 - 18:25 | 888531 Sean7k
Sean7k's picture

Calpers is not in bankruptcy. It is underfunded. Calpers is allowed to pull from the General Fund in the event it has funding difficulties. Pensions, like the Teachers, cannot. This is why most Calpers people aren't worried. 

Wed, 01/19/2011 - 18:29 | 888544 faustian bargain
faustian bargain's picture

As California goes, so goes CalPers.

Wed, 01/19/2011 - 18:45 | 888611 Bastiat
Bastiat's picture

Yeah, Calpers, like most public pension funds, is in the spiral: bad portfolio performance means lower actuarial assumptions to calculate contributions levels.  Often they are done a on moving average basis.  Years of bad performance increase the amounts that need to be contributed.  Stressed municipalities will have a hard time increased contributions in a contracting economy. 

Wed, 01/19/2011 - 18:29 | 888550 Bastiat
Bastiat's picture

No, I meant the Vallejo bankrupcy, Calpers is involved as a claimant (or whatever its called) sorry for the confusion.

Also, are you sure about all Calpers accounts?  I mean there are separate accounts for municipalities and agencies that are independent of the large state employees account.  I seriously doubt the State is backing all local retirement accounts run by Calpers. That's the point I was trying to make.

Wed, 01/19/2011 - 18:41 | 888590 Sean7k
Sean7k's picture

That is my understanding. They recently applied for a transfer of about 600 million and Arnold had a fit (think it was 6-9 months ago). They held off for the time being as it created quite a protest.

Guess you could research it. Let me know if you find anything different. 

Wed, 01/19/2011 - 19:06 | 888676 Bastiat
Bastiat's picture

“Vallejo has substantial unfunded and under-funded obligations to CalPERS in the approximate amount of $84 million dollars,” Felderstein said in the June e-mail. “As such, CalPERS is a creditor of Vallejo and must protect its own claim in Vallejo’s Chapter 9 case.”

I do believe the State has no responsibility or exposure to these municipal pension plans administered by Calpers.  But I'm no expert on that stuff. I do wonder how it shakes out if Calpers doesn't get adequately funded--what happens when the portfolio is gone and Vallejo can't pay enough to fund.


Wed, 01/19/2011 - 19:20 | 888713 Sean7k
Sean7k's picture,0,40628.story

There are additional citations. Guess it was 700 million. 

Wed, 01/19/2011 - 20:14 | 888820 Bastiat
Bastiat's picture

My guess is that the request to the State for a larger contribution to Calpers is with respect to the State employees pension plan only.  If Vallejo's seperate plan is underfunded, that is between Vallejo and Calpers and does not affect the State.  

Wed, 01/19/2011 - 18:35 | 888573 Bastiat
Bastiat's picture

"Vallejo’s plan assumes the city can’t provide essential services, like police and fire protection, while also paying its debts, he said. Should the city succeed, the case “may become an important precedent,” Bennett said in an interview.

The creditors, who include retirees and former employees, would be paid $6 million over two years. The plan must first be voted on by creditors before U.S. Bankruptcy Judge Michael S. McManus decides whether to approve the proposal."

Wed, 01/19/2011 - 18:40 | 888589 Bastiat
Bastiat's picture

But I can't get enough info out of these fragmented news blurbs to really figure out just what the deal is with the pensions.

But how bad was it in Vallejo with labor costs?

Vallejo made its filing as labor costs, its largest expense, were projected to be about $79.4 million in the 2008- 2009 fiscal year, outpacing estimated net general-fund revenue of about $77.9 million, according to court documents.

Good lord. The big question is how much of the retirement costs/contribution is being written down/deferred.



Wed, 01/19/2011 - 20:53 | 888861 Rainman
Rainman's picture

Many CA City and County arrangements with CalPers are booked on an accrual basis to CalPers...meaning CalPers books those unfunded amounts due as money good. Riverside County, encompassing the geography of the Orange County border to the State of Arizona, is underfunded to CalPers to the tune of $ 800 million, last count. That amount exceeds the size of the county's annual operating budget. This is just one county snapshot out of 58 counties in CA.

You are correct about the fragmented tales concerning CalPers pension figures.

Thu, 01/20/2011 - 01:31 | 889279 papercanteen
papercanteen's picture

It was bad, and frankly it still is.

Look for yourself

You can read our local indie papers coverage of the scandal (pretty much the only media coverage it got early on) here

I've been a resident of the surrounding area all my life and lived in Vallejo for the last 4 years - It's an old navy town that's been dying as long as anyone can remember - every once in a while someone trys to bring industry (you know, jobs) back to Mare Island (the old navy yards) but the city council, or local enviro groups, or general stupidity destroys that opportunity.    Vallejo is actually a very nice place to live, and while it doesn't have jobs it has some very nice old neighborhoods with beautiful victorians and craftsman style houses.  The community is majority black, but there didn't used to be a ton of tension.    I lived right in the heart of downtown for the last few years before moving to a house in a small neighborhood, and things have degraded quickly.  Lots of homeless on the streets, a camp set up in the marsh next to the highway that the cops are always chasing them away from.    Another vacant lot where people go to sell their stuff after they get evicted.


The various public service unions have been "negotiating" with our city "leaders" for years, and the tone was made clear when the lead delegate from the police union said "Fire however many you want, but don't cut our pay" (I'm paraphrasing, but it really was that blatant) - So that's what's happened.  Now there are times when our city of 120,000 has less than 5 police on duty, and they're doubled up in patrol cars for safety (read that in the paper a few weeks ago, joy of joys)  - Of course, they're still taking time to nail people for moving violations but then who expects anything more in these backwards times.


A good friend of ours actually was talking about all of the robberies this morning, they're concerned enough that they're putting their house up for sale (not in the best neighborhood, but not that bad either) in this market.  Crime is bad, but not 3rd world country bad.   In the two years I've lived in my current address, we've only had police blockade our street while they send a dog in the window to take out a 14 year old robber   Like I said, it's a quiet street.

Another major problem for vallejo is it's been hit harder and longer than the surrounding area re: the housing market.  Another friend of ours bought their house about 2 years ago, picking up a house that sold 4 years before for 548,000 for less than 150,000, and Vallejo has been the subject of major subdivision projects (same as the golf courses, it's been an attempt to "napa valley"ize vallejo, which of course never works.

It's sad, because through all of it Vallejo maintains a pretty energetic art scene - Most of the main street (Georgia St. and surroundings) is taken up by little studios in a major case of artists taking advantage of a collapsing market where able.  Downtown has 70% vacancy, and is losing more businesses with every month that passes, so some building owners look at this and say "Well, the market sucks so bad I'd rather take something than nothing" and rent it to an artist.   And of course there are others who have been in a continual panic because they spent way too much money on their building and nobody wants to rent it, so instead of dropping the price it lies vacant.   The other problem of course is that the buerocracy in vallejo is just miles thick, and very control oriented.  Business across the street (middle of downtown) went belly up having never opened, but being fully stocked and ready to go (it was a 4,000sf sports bar) because the city had played regulatory pinball (they had to do incredible alterations to the building, and then refused to give them a liquor license) with them until the funds ran out (4 years later) and the location became vacant (all the stuff is still in there too this day).  


It's just sad, because there are people who keep trying every day to bring jobs here, but there is just zero political will to do any of it and we're still talking about how to arrest more prostitutes instead of dealing with *ANY of the core issues.  Vallejo is a city on the verge of losing hope, and it's just sad as hell.

Thu, 01/20/2011 - 02:37 | 889349 Founders Keeper
Founders Keeper's picture

Thanks for your post, papercanteen.

Thu, 01/20/2011 - 03:14 | 889371 ThreeTrees
ThreeTrees's picture

Worthwhile read!  You paint a very vivid picture.  A disturbingly vivid picture, but vivid nonetheless.

Thu, 01/20/2011 - 05:09 | 889425 DaBernank
DaBernank's picture

Wonderful post! I'm sending it to Cali friends. I'm glad you include the bit about the artists, being a musician, I looked on with sadness as trendy money moved in to dynamic places like Williamsburg in Brooklyn, Austin Texas and thriving artistic communities were driven away.

Thu, 01/20/2011 - 08:06 | 889485 grey7beard
grey7beard's picture

Sounds a lot like the town I just escaped from.  The only difference I see is the town I left did have it's wealthy enclaves and business that catered to them, but, if you were outside of that special class, very much like what you describe.

Thu, 01/20/2011 - 11:33 | 889977 Bastiat
Bastiat's picture

Great post, papercanteen, thanks. 

Thu, 01/20/2011 - 07:58 | 889482 nedwardkelly
nedwardkelly's picture

But I can't get enough info out of these fragmented news blurbs to really figure out just what the deal is with the pensions.

If you do happen to find out, please let us know. I don't think it matters what they do short term if the long term pension problem isn't solved... If the beneficiaries of some of these absurd benefit plans don't take a haircut one way or another, long term someone is going to get screwed.

Thu, 01/20/2011 - 10:57 | 889250 TruthInSunshine
TruthInSunshine's picture

Gee, states defaulting...what next...countries?...the PIIGS+UK?...USA???

Are we all Vallejoans, now?

Wed, 01/19/2011 - 17:57 | 888438 Arkadaba
Arkadaba's picture

But it is grey - not black and white. Probably the biggest holders of municipal debt are those same unions and pension funds. (Don't have data specifically for the US but guessing similar to other Western nations). 

Wed, 01/19/2011 - 18:34 | 888568 Ride30B430
Ride30B430's picture

Tax Exempt entities (pension funds, 501(c)3s, municipalities, ect) generally do not hold tax free debt because they do not pay taxes. 

Wed, 01/19/2011 - 20:19 | 888824 midtowng
midtowng's picture

The public employees in Vallejo have already given up large chunks of salary and pensions.

Wed, 01/19/2011 - 21:15 | 888899 Trimmed Hedge
Trimmed Hedge's picture

And yet, oddly enough, they're still over-compensated....

Wed, 01/19/2011 - 23:31 | 889178 Lord Koos
Lord Koos's picture

And you would know this because...?

Thu, 01/20/2011 - 01:21 | 889286 midtowng
midtowng's picture

To give you an idea of how much the public employees have already given up:

"Health-care benefits for the municipality's 400 retirees and surviving spouses are also scheduled to shrink —to $300 a month, down from the $1,500 a month that some currently receive."

Wed, 01/19/2011 - 17:23 | 888278 Sutton
Sutton's picture

A debt market in trouble?

You know who and what is coming.

Hilsenrath, get your pen and paper.

Wed, 01/19/2011 - 17:24 | 888279 Arius
Arius's picture

hey here is an idea...take the 6 million and invest it on two years will triple...problem solved - now, Valejo (or whatever is spelled) can pay the UNsecured creditors in full

Wed, 01/19/2011 - 17:24 | 888286 EscapeKey
EscapeKey's picture

Who are the creditors, btw?

Wed, 01/19/2011 - 17:26 | 888293 DonnieD
DonnieD's picture

At 5-20 cents on the dollar I'd say everyone but the pensioners.

Wed, 01/19/2011 - 19:01 | 888661 cxl9
cxl9's picture

Did you read the article? The unsecured creditors are primarily Union Bank and National Public Finance Guarantee (a monoline insurer, part of MBIA). Is NPFG attempting to recover on behalf of bondholders? Or did they make bondholders whole and are now trying to recover something for themselves? I would assume the latter, but I am not too familiar with the details of bond issuance.

Wed, 01/19/2011 - 17:27 | 888297 John Law Lives
John Law Lives's picture

That is a bold claim to suggest Vallejo is a harbinger of a coming muni bloodbath.  It is a specific case in a specific municipality.

Wed, 01/19/2011 - 17:30 | 888315 andybev01
andybev01's picture

True, it's only one canary but the coal mine is gigantic.

Thu, 01/20/2011 - 00:50 | 889259 TruthInSunshine
TruthInSunshine's picture

Black lung, explosions and methane for many yet to come...'s the start of something not so good.

Wed, 01/19/2011 - 17:31 | 888321 DaveyJones
DaveyJones's picture

municipal bankruptcy??

Wed, 01/19/2011 - 17:35 | 888341 SheepDog-One
SheepDog-One's picture

Well then what is it to assume other munis are doing fine?

Wed, 01/19/2011 - 17:40 | 888364 John Law Lives
John Law Lives's picture

Municipalities should each be evaluated based upon their own circumstances.  Vallejo is one instance.  That has zero bearing on how General Obligation munis from another state (e.g. Texas) are doing.

Wed, 01/19/2011 - 18:00 | 888451 faustian bargain
faustian bargain's picture

It seems investors are spooked, and therefore it has plenty of bearing on the general market.

How many states are prepared to bail out their cities? (Not California or Illinois, that's for sure.) How many cities are prepared to raise taxes and fees, and cut services, to avoid default? Which cities are more likely to be in financial trouble - the ones generally populated with citizens who can afford an increase in austerity, or the ones with citizens who can't? What do you think the people of those cities will do, when services are cut?

This is the bubble economy in microcosm, with the added disadvantage that cities can't just print money. Will the Fed bail the munis out? I'm sure that's on the table, despite any public denials.

Wed, 01/19/2011 - 18:06 | 888473 John Law Lives
John Law Lives's picture

The health of Vallejo as a municipality has zero bearing on the health of municipalities in other US States (e.g. Texas).  California and Illinois may be rife with financially strapped municipalities, but that doesn't portend a bloodbath across the spectrum.   

Wed, 01/19/2011 - 18:10 | 888491 faustian bargain
faustian bargain's picture

So, we've got Texas put forward. What other states are in good financial shape? I hope they're strong enough to spearhead our country's 'recovery'.

Wed, 01/19/2011 - 18:18 | 888511 John Law Lives
John Law Lives's picture

Every state and municipality has its own budget and revenue stream to manage.  Their bonds must be evaluated as potential investments based upon their own merits.

Wed, 01/19/2011 - 18:30 | 888554 faustian bargain
faustian bargain's picture

Yes, and increasingly those merits are sinking across the board. Granted some are probably running up the down escalator.

Wed, 01/19/2011 - 18:50 | 888630 Ride30B430
Ride30B430's picture

Many funds use leverage so when the margin calls come it will not make a difference.  Just something to think about.

Wed, 01/19/2011 - 21:41 | 888952 nmewn
nmewn's picture

I sense a disturbance in the force.

Thu, 01/20/2011 - 00:28 | 889237 Village Idiot
Village Idiot's picture

..but there's something... strange about it.

Thu, 01/20/2011 - 00:48 | 889256 Hephasteus
Hephasteus's picture

Something strange indead. It seems to have awakened it's arch enemy. Majeur.

Wed, 01/19/2011 - 18:30 | 888553 Richard Head
Richard Head's picture

Texas's relative health is apparently turning out to be a sham.

Wed, 01/19/2011 - 18:47 | 888622 John Law Lives
John Law Lives's picture

According to Beavis?

Wed, 01/19/2011 - 19:37 | 888749 Terminus C
Terminus C's picture

Actually that is Butthead, and really... by that logic, should we listen to anyone called John Law, the great Scottish Ponzi impresario?


Thu, 01/20/2011 - 09:34 | 889614 John Law Lives
John Law Lives's picture

I didn't say that image was Beavis, you simpleton. If that image is Butthead, it stands to reason that Beavis could be its source of information.  Therefore, I inquired if Beavis was the source of his claim.  Does that compute with you?

Wed, 01/19/2011 - 18:33 | 888567 Logans_Run
Logans_Run's picture

I wouldn't say Texas because there has been significant talk about Houston being insolvent.

Wed, 01/19/2011 - 18:42 | 888602 John Law Lives
John Law Lives's picture

So says the Sandman...

Wed, 01/19/2011 - 20:32 | 888840 StychoKiller
StychoKiller's picture

There are only 4 states in good fiscal shape:  Alaska, North Dakota, Montana, and Arkansas.

Wed, 01/19/2011 - 23:57 | 889209 JLee2027
JLee2027's picture

Alaska, North Dakota, Montana because of constant/growing oil revenue.

But Arkansas? Why?

Thu, 01/20/2011 - 00:45 | 889249 Hephasteus
Hephasteus's picture

Free fertilizer. The clintons bury bodies there.

Thu, 01/20/2011 - 02:11 | 889329 faustian bargain
faustian bargain's picture


Thu, 01/20/2011 - 02:43 | 889354 SoCalBusted
SoCalBusted's picture


Wed, 01/19/2011 - 22:12 | 889051 mouser98
mouser98's picture

methinks, Texas needs to seriously start inching towards the lifeboat, before the Titanic tips and dips.  they have a chance to come out of it okay, but only if they act soon.  i just wonder if they will.

Thu, 01/20/2011 - 02:17 | 889333 PulauHantu29
PulauHantu29's picture

Texas is in serious trouble, more then you think since the wealthy property owners REFUSE any higher property taxes and the masses head to the State Capitol with pitchforks if the legislators even mention a state income tax.

So far, the legislators propose serious cuts to guess what? and social services.Long term this one sided policy will hurt the states since one of its strong points now is pretty good higher education (and abysmall primary and secondary education).



Thu, 01/20/2011 - 06:58 | 889458 Rodent Freikorps
Rodent Freikorps's picture

Personally, I'd like to see Texas tell the federal government to take their regulations, and unfunded mandates, and stick them in their ass.

Thu, 01/20/2011 - 09:13 | 889561 grey7beard
grey7beard's picture

But don't touch the defense contracts.

Thu, 01/20/2011 - 11:12 | 889901 mouser98
mouser98's picture

Texas will need those defense contractors to help clear the way to the lifeboats

Thu, 01/20/2011 - 01:20 | 889285 papercanteen
papercanteen's picture

The lesson that should be learned from Vallejo is that sweetheart deals between public employee unions and frightened/corrupt city leadership leads to unsustainable systems.

The next logical question then is "Do other muncipalities engage in this?" - and the answer (in my experiance) is yes.

Thu, 01/20/2011 - 11:37 | 889985 Bastiat
Bastiat's picture

Yes.  And they will need to cut those pensions. SF will go back to the voters with a proposal to cut health benefits this year--guaranteed.  I don't know if the governor can do it--even Whitman was said to have made a deal with police and fire in order to get at the teachers and SEIU. 

Wed, 01/19/2011 - 22:04 | 889029 Freewheelin Franklin
Freewheelin Franklin's picture

What do you think the people of those cities will do, when services are cut?


We're going to find out.

Thu, 01/20/2011 - 00:34 | 889242 Village Idiot
Village Idiot's picture

"As many as 383 workers, representing one-fourth of the local government work force, are expected to lose their jobs, including about half the police force and one-third of the city's firefighters."


Thu, 01/20/2011 - 03:16 | 889373 faustian bargain
faustian bargain's picture

Things are about to get really real in NJ. At least, until the Sopranos step in and start a protection racket.

Wed, 01/19/2011 - 18:08 | 888482 Sean7k
Sean7k's picture

Part of the risk assessment on government paper is that it would never fail. It is a "safe" investment. What happens when it is no longer safe?

Rates rise, investors seek other investments and credit becomes more difficult to acquire- making the situation worse. It can snowball- thus the "bold" prediction. Of course, if your going to go- go bold! It 's what Tyler does.

Wed, 01/19/2011 - 18:24 | 888529 John Law Lives
John Law Lives's picture

<<<  Of course, if your going to go- go bold! It 's what Tyler does. >>>

Tyler has been spot on about the stock market over the last 19 months, hasn't he/she?  As much as I initially disliked Robo (whoever that is), he/she has a better track record on that score.

Wed, 01/19/2011 - 18:30 | 888556 Sean7k
Sean7k's picture

I have yet to hear Tyler divulge his investment portfolio or trading strategy. I often see some very erudite comments by Tyler when the spirit or discussion moves him. 

If you make the mistake of confusing the site content with actual trading strategies, that is not Tyler's fault. As for Robo- he is a trader. I listen to all his advice and use anything I find useful after doing my due diligence. Like most of us, he is sometimes right and sometimes wrong.

Unlike most sites, ZH requires that you learn to think for yourself, rather than follow the herd. It is a new experience for many.

Wed, 01/19/2011 - 18:37 | 888583 John Law Lives
John Law Lives's picture

Are you actually seriously suggesting that Tyler has not shown an overwhelmingly cynical (and bearish) sentiment toward the equity markets?  Are you serious?  I agree that Tyler does not give out stock picks, but his bias is obvious.

<<< Unlike most sites, ZH requires that you learn to think for yourself, rather than follow the herd. It is a new experience for many. >>>

The articles and the majority of comments on this site are a remarkable demonstration of "Group Think".  Maybe you are too far immersed to recognize that.

Wed, 01/19/2011 - 18:50 | 888626 Sean7k
Sean7k's picture

I have no idea what Tyler's editorial policy is. I know that ZH provides a wide variety of material from both bearish and bullish points of view. I have no idea who chooses the titles as many of the articles are submitted from writers outside of ZH. You would know this if you read the whole title and credits. I don't assume to know his bias and fail to understand what great intelligence allows you to do so. The majority of comments(have you actually sampled?) mean nothing to me. I see plenty of contrarian insights and find them quite useful. Of course, I've learned to question authority and think for myself...

Wed, 01/19/2011 - 18:59 | 888656 John Law Lives
John Law Lives's picture

<<< I know that ZH provides a wide variety of material from both bearish and bullish points of view. >>>

You are completely delusional if you think this site offers a "balanced" view of bullish and bearish viewpoints.  It is obvious to the casual observer who actually reads a majority of the articles published here.

<<<  Of course, I've learned to question authority and think for myself... >>>

Congratulations.  That puts you one step higher than a simian in the evolutionary chain of life.  Next step, troglodyte!

Wed, 01/19/2011 - 19:28 | 888737 Sean7k
Sean7k's picture

You are so delusional, you have used a quote of "balanced" in reference to my post. Wide variety does not mean balanced. Casual observers could hardly read a "majority" of the articles published here. You fail to answer any point presented, then attempt to place me somewhere below human on the evolutionary ladder? Where does that place you?

The problem with Trolls, is even if you feed them, they never get any smarter. 

Thu, 01/20/2011 - 09:38 | 889622 John Law Lives
John Law Lives's picture

You have not made a point that merits a reply.  You are spouting pablum.

I imagine it hurts to be made to look daft on a thread.  Good thing that nobody here knows your true identity.

Wed, 01/19/2011 - 23:17 | 889164 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

You think you perceive some sway, so what?

If you really follow this site (which isn't easy because of the volume) you will likely see that alternate viewpoints are constantly being argued, and sometimes even well-argued.

casual observer who actually reads a majority of the articles published here

That is an oxymoron.

Thu, 01/20/2011 - 10:01 | 889696 John Law Lives
John Law Lives's picture

No, it is not.  You do not define the limits of what defines "casual".  My bandwidth likely exceeds your own.  Therefore, I can casually read a great deal.

Wed, 01/19/2011 - 19:19 | 888711 Max Hunter
Max Hunter's picture

The articles and the majority of comments on this site are a remarkable demonstration of "Group Think".  Maybe you are too far immersed to recognize that.

Contrarian, Sober, Realistic, are not definitions of "group think"..  Silly rabbit..

Wed, 01/19/2011 - 21:07 | 888880 Rainman
Rainman's picture

Rabbit's obviously referring to Harry's repeated postings. Makes me nuts too.

Wed, 01/19/2011 - 22:03 | 889024 foofoojin
foofoojin's picture

everybody in this little tangent from the subject at hand need to realize that the world is not "fair" and "balanced" outside of Newtons laws of thermodynamics.  and that is  only when understanding and being able to observe the whole of the system. And if you can do that, then I don't think you would be posting on ZH. 

If any evolution need to occur it is that observing two extremes ideologies does not give you anything close to the reality or mean you went to a fair and balanced website. It mean you observed two world views. the TRUTH may be in neither one.  BOTH SIDES COULD BE WRONGE! 

Wed, 01/19/2011 - 22:01 | 889019 USD-25
USD-25's picture

Stops are for kids?

Wed, 01/19/2011 - 23:34 | 889186 Lord Koos
Lord Koos's picture

There are plenty of hysterical and unrealistic posts on ZH.

Thu, 01/20/2011 - 00:30 | 889239 PalmiticGlycerin
PalmiticGlycerin's picture

In economics, laissez-faire (English pronunciation: /?l?se??f??r/  ( listen), French: [l?sef??]  ( listen)) describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies.


Well,  I'm not sure about the free from state intervention part....

Thu, 01/20/2011 - 09:42 | 889630 John Law Lives
John Law Lives's picture

Being "contrarian" does not exempt one of "Group Think".  Contrarian thinkers can be just as collectively dogmatic as those whose views they reject.  Think about it...

Wed, 01/19/2011 - 23:31 | 889179 Fearless Rick
Fearless Rick's picture

Personally, I've been out of stocks for more than two years and was barelly invested before that time.

Equity investors seeking fast returns have done well, for now.

The game continues to change. When reality bites, it bites hard.

Thu, 01/20/2011 - 07:05 | 889464 Rodent Freikorps
Rodent Freikorps's picture

Heh. I remember when it was hard to lose money during

I remember a lot of guys later, divorced and riding the bus.

Thu, 01/20/2011 - 01:35 | 889272 Village Idiot
Village Idiot's picture


Thu, 01/20/2011 - 03:58 | 889395 faustian bargain
faustian bargain's picture

The equity markets deserve bearish sentiment. Cynicism...that's in the eye of the beholder. If you choose to believe that the government, the Fed, the banks, the mainstream media, and the Wall Street establishment are all operating in a transparent manner, well that's your problem. Me, I think it's pretty safe - not cynical - to assume the US government, the Fed, and big banks are involved in manipulating the stock markets, are playing dangerous games with the world's economic future, and are indulging in monetary and fiscal policies that steal wealth from the people for the benefit of government expansion and of the international banking balance sheets.

Further, there is plenty of conceptual backing to the idea that our fiat currency system was designed specifically for manipulating, expropriating, and redistributing the public's wealth. Our economy has become a field for the political and financial elites to scrape wealth from the people via monetary, fiscal, political, regulatory, and cultural means. It's a near perfect perversion of free markets into fascism. This is not groupthink, you can see it easily in the examples of bailouts and backstops for "TBTF" companies.

Yes, there is bias at zerohedge, but to pretend there's not a problem in the macroeconomic picture of the world right now would be intellectually dishonest. In a non-bizarro world, the stock market and economy would have crashed long ago. But because of the players mentioned above, the charade has been extended beyond belief. All we can do is marvel at the gravity-defying markets, and just wait for some black swan to tip over the whole precariously-balanced apple cart. The sentiment here is much less about cynicism than it is incredulosity.

Hope and belief might help one get up in the morning, but it will not save the economy. What will, is the elimination of magical thinking that says we can live beyond our means, that the government/Fed can successfully and sustainably control and manage the economy, and that our paper money is worth whatever the government/Fed says it is, in perpetuity, without recourse.

Just because many of us agree on things, doesn't make the ideas Groupthink. That's a lazy way of trying to discredit an argument.

Wed, 01/19/2011 - 18:31 | 888561 faustian bargain
faustian bargain's picture

You'd better hope the Fed jumps into the muni market then.

Wed, 01/19/2011 - 18:22 | 888525 Sean7k
Sean7k's picture

in 2009, Texas had 34 billion dollars in debt, 1,340 per person. Every state has problems.

Wed, 01/19/2011 - 18:31 | 888559 John Law Lives
John Law Lives's picture

Every municipality must be evaluated on its own merits.  Vallejo is one case.

Wed, 01/19/2011 - 22:39 | 889102 UncleFester
UncleFester's picture

To envoke John Law and then not understand what makes top-down, inside-out, collectivist, Ponzi math of the living pyramid work is ironic (to say the least).  Have it your way...evaluate each on merits...then what Einstein?  Carve out the bad munis and toss them into the Pacific?  Allow them to default, declare BK and start over while the healthy munis continue to pay their bills? 

OK, I'll tell it like it is since you can't seem to figure it out.  The munis that are BK will be bailed out by the States, but the States are BK and will be bailed out by the Federales, but the Federales are BK so they will raise the debt ceiling...again.  Meanwhile, the Fed will continue to provide the cheap meth until 1) the Federales all die, 2) the Federales transform into anti-Federales, 3) the Federales become part of a larger group of Federales.

Here endeth the lesson,

I Fester 

Thu, 01/20/2011 - 01:14 | 889276 mouser98
mouser98's picture

we live in interesting times. 

Thu, 01/20/2011 - 02:53 | 889364 Founders Keeper
Founders Keeper's picture

[The munis that are BK will be bailed out by the States, but the States are BK and will be bailed out by the Federales, but the Federales are BK so they will raise the debt ceiling...again.]---UncleFester

That's just about what I was thinking.  Good post, thanks.


Thu, 01/20/2011 - 10:02 | 889662 John Law Lives
John Law Lives's picture


I have not evoked anyone of particular importance named John Law by choosing to use that name.  You assume I have done so.  You assume wrong.  Does every person who goes by the name "John" evoke some specific person named "John"?  I think not.

I own munis as an investment.  Before I purchase specific munis, I do research on the specific municipality to determine the worthiness of its bonds as an investment.  When I consider General Obligation bonds issued by a municipality in the State of Texas (for example), I DO NOT CONSIDER THE FISCAL CONDITION OF VALLEJO.  Neither does any institution that would assign a rating to that bond.  Does that make sense to you?

Here endeth the lesson,

John Law Lives


Sun, 01/23/2011 - 00:49 | 896743 UncleFester
UncleFester's picture

"I have not e(n)voked anyone of particular importance named John Law by choosing to use that name. You assume I have done so. You assume wrong...."

I'll give that one some special space all to its own, Mensa boy.

Such a cleverly constructed name, only 2% of the population will get it! After all, this is a blog about political economy and everyone here will assume your avatar's name is about the economist that caused the Mississippi Bubble. Ha, Ha, Ha, the joke's on them! Only you and the other 2% know what it really means, right? You knew everyone else would make that assumption.

Oh yeah. As far as the munis are concerned, it's all a matter of timescales. Some look good now compared to others, but when everyone is about to get charged more for the math, Mensa boy. Relying on "institution(s) that would assign a rating to that bond", might be detrimental to your fiscal health. After all, the institutions you are referring to had AAA ratings for BSC, AIG, FNMA, etc.


Wed, 01/19/2011 - 22:29 | 889088 mouser98
mouser98's picture

Texas isn't in that bad a shape considering its population and economy.  Unlike some other states, Texas has yet to tax to the point of diminishing returns.  Every state does have its problems, but of all of them, other than maybe Alaska, Texas is in a unique position to uncouple itself from the evil empire and go its own way.  I just wonder what it might take to provide enough incentive for the legislature to move in this direction.

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