The Muni Bond Crisis Is Officially Here: Harrisburg Drops $3.3 Million in Muni Payments

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Wed, 09/08/2010 - 13:17 | 569798 RockyRacoon
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10) Civil unrest in the US

(Getting there but not yet: see Atlanta riots at section 8 housing)

Hyperbole is unnecessary.  Lots of people milling about is not a riot.  I'm with you on the entire premise of the article, but there's no need to exaggerate.

Wed, 09/08/2010 - 12:09 | 569618 Gromit
Gromit's picture

The first of many silly alternative energy programs has been exposed by the Harrisburg failure.

Wed, 09/08/2010 - 11:39 | 569546 LooseLee
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Not to worry. Uncle Benny will paper it over. Problem solved! Buy Gold & Silver!

Wed, 09/08/2010 - 11:21 | 569503 bugs_
bugs_'s picture

The dreaded Harrisburg IOU

Wed, 09/08/2010 - 10:43 | 569388 papaswamp
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And the market rallies on paying no attention....

Wed, 09/08/2010 - 09:54 | 569246 Mad Mad Woman
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Harrisburg went to the bondholders and asked for a deal to lower the payments and interest rate & bondholders said no. I would have told them they either work with the city & still get a return OR don't work with the city, city files for bankruptcy & you get nothing. Which do you want, still getting a return or nothing?

Harrisburg is now 83 days away from a $34 million debt payment. If they couldn't make the $3.3 million payment they sure as hell aren't going to be able to come up with $34 million. The new mayor still hasn't come up with any plan for the debt, she just hired a consultant to come up with options for the city, and she refuses to answer questions about a plan, any plan for the debt.

The city controller is advocating bankruptcy because he sees no other way out. He has studied all the options and that is his conclusion. I agree with him. The only question now is which bankruptcy does the city file for?

The city can't raise taxes because the tax rates are already too high in the city, and the state has reduced it's share of money it gives the city in return for city services for the Capital. The Capital got away too cheap in the past, the city never really addressed that. The state should have paid the city a lot more money for the city services they receive.

The city is in a bind because of the previous mayor and numerous city councils over the last 25 years couldn't come to agreement about things, and then the previous mayor went rogue and started spending money that wasn't the city's for western artifacts for a western musuem idea that he had. So now the city is stuck with artifacts that originally cost about $31 million and is now worth a lot less. It's all top-shelf, excellent quality artifacts. The city did sell some of the items but didn't get what they wanted price-wise because of a down antiques market.

Can I interest anyone in some western artifacts? You can buy these top shelf items for a song now. If interested please contact the City of Harrisburg.

Wed, 09/08/2010 - 12:09 | 569619 NotApplicable
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Well, it might've been worse, you know. The mayor and the city council could've reached agreement!

Then they all go rogue together.

In my town, they sold $27M in taxable Bankrupt America Bonds in the last year alone.

Good times, good times.

Wed, 09/08/2010 - 09:16 | 569192 tony bonn
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debt proves how wealthy you are - this is not like personal finance....so unless governments pile on more debt, everyone will think that they are poor....just ask any mba congressman....

Wed, 09/08/2010 - 08:29 | 569112 ncontrol
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Wow, those were some pretty wide-open predictions.

How about being a little more specific?

Civil unrest? Oh, a fight broke out in a bar.. Check!

Wed, 09/08/2010 - 11:30 | 569525 DaveyJones
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it's the reason the fight broke out that counts

Wed, 09/08/2010 - 02:14 | 568926 Bearster
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I am short MUNI, and even today on a 1% down day, it was up 2 cents.  I would say the municipal bond crisis hasn't broken yet.  Obviously we all agree it will at some point...

Wed, 09/08/2010 - 01:42 | 568904 pitz
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Why on earth does the muni bond market even exist?  Creditors can't seize municipal assets (for the most part) because of sovereign immunity.   And politicians can't be trusted to be fiscally responsible.

This junk is even worse than US treasuries.

Wed, 09/08/2010 - 02:24 | 568932 Sequitur
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You can go after the underwriters. Also, you can purchase insured muni bonds. While most states are broke, insurers are doing reasonably well, and some of them are sitting on enormous reserves.

Wed, 09/08/2010 - 03:58 | 568982 jeff montanye
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insured muni bonds sure didn't trade in 2008 like the insurers were doing reasonably well.  at least with the treasury backed ones (escrowed to maturity, pre-refunded, new public housing) you know the credit risk better.

Wed, 09/08/2010 - 09:58 | 569257 MarkS
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The history of Muni Bond Insurance isn't about insurance.  It was a way to take 55,000 municipalities and come up with a credit rating system that would allow ease of distribution. 

For a small sum, you as a municpality could buy 'insurance' which made your bonds AAA.  There was never a question of actually using the insurance.  Heck, the rate of municipal default from before the Civil War is close to zero considering the millions of of bonds issued (I'm talking CUSIPs, not $).  "Selling" muni insurance was abouit the safest business around - why do you think Buffet got in the game?

Then the credit crisis hit and there was fear that insurers would default due to their MBS obligations and pending legal disputes and legislation.  The Muni market got crushed for the wrong reason, we are three years into this and the muni market has been fine so far.  There has never been a major default where the bondholders did not get back there principal (par) at a minimum.

Now, I think that there are big problems to face in Munis going forward but, given the FEDs hate that munis are federal tax exempt I could se that some point down the road the FEDs step in with a deal to backstop munis with a loss of tax free status...

 

Wed, 09/08/2010 - 11:27 | 569522 DaveyJones
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good point. that's one way to force more folks to quit buying local crap and start buying federal.  

Wed, 09/08/2010 - 02:06 | 568919 Millennial
Millennial's picture

I called my ex worthless one day. A week later she blew me. So unless Treasuries end up blowing me I agree they are worthless.

Wed, 09/08/2010 - 01:41 | 568899 IslandMan
IslandMan's picture

Suggested correction:

The word "risky" in the para beginning "These folks..." should be "riskless".  It kinda makes a difference to the meaning.

Wed, 09/08/2010 - 01:33 | 568893 JuicedGamma
JuicedGamma's picture

If Harrisburg gets away with this the potential for a massive risk repricing is frightening.

Wed, 09/08/2010 - 09:34 | 569218 Mad Mad Woman
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Gets away with what?  Harrisburg is not getting away from anything here. I live in Harrisburg. Harrisburg is broke, busted, kaput. The only question now is which bankruptcy is Harrisburg going to file for?

Wed, 09/08/2010 - 01:01 | 568871 I am a Man I am...
I am a Man I am Forty's picture

Right, the muni bond market is 2 to 3 trillion in size and 3.3M in defaults is a crises???  Why didn't you go with Jefferson County in Alabama, you could have been right a long time ago?

Wed, 09/08/2010 - 05:56 | 569018 A Man without Q...
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All crises have a starting point, just like all traffic jams start with one vehicle breaking sharply...

Wed, 09/08/2010 - 10:33 | 569142 I am a Man I am...
I am a Man I am Forty's picture

I follow the muni bond market very closely, Harrisburg is nothing new and has had financial problems for a long time now.  The muni bond market has no clue there is a crises.  Got prices yesterday and bonds are through the roof.  Do I think some states and locals are going to have some major problems?  YES.  Illinois is a financial disaster, sold all of our muni bonds in IL, NJ, NV, and CA into this STRENGTH.  But crisis it is not, not yet anyway.

Wed, 09/08/2010 - 12:29 | 569658 Almost Solvent
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Not NY?

Wait, our saviours in Albany can just raise taxes (again):

Cigarettes

Real Estate

Water

Soda

Sugar

Fat

Gas

Online Retail Purchases

Et al!

Wed, 09/08/2010 - 03:53 | 568979 jeff montanye
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nice reference.  see where the al default was helped by jp morgan, later penalized some $75 million.

Wed, 09/08/2010 - 08:44 | 569131 I am a Man I am...
I am a Man I am Forty's picture

And I believe JPM paid Goldman going away money so they could take advantage/financially destroy the county all by themselves, you of course need some greedy politicians and corrupt businessmen to do the tremendous job they did in AL.

Wed, 09/08/2010 - 11:30 | 569504 DaveyJones
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.

Wed, 09/08/2010 - 01:00 | 568869 doolittlegeorge
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talking "Harrisburg" makes me think of the first "Dr Evil" demand for "one MILLION dollars."  (insert global money laughter here.)  There "is an end" i agree. I just can't comprehend "where we're at right now" so it's hard for me to see it.

Wed, 09/08/2010 - 12:15 | 569628 Zero Debt
Zero Debt's picture

Dr Evil wouldn't be so stupid to demand one million in fiat currency. He's gonna ask for exclusive use of the printing press.

All my IOU are belong to you!

 

 

Tue, 09/07/2010 - 23:51 | 568789 robert_paulson
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Pretty good forecast overall but you were clearly wrong on #8.  Interest rates have fallen and inflation has not "broken loose".  There has been some food inflation but that's due to the wheat situation; it's not general.  And moderate inflation in a few food categories is not inflation "breaking loose" by any stretch of the imagination, especially when everything else is deflating.

Also, China's credit bubble has not popped.  It might (I think it will), but it hasn't.  That one is still TBD.

You strain your credibility by claiming accuracy when you were clearly wrong.  Better just to say that so far you've been wrong on that but you still think it will happen down the road.

 

 

Wed, 09/08/2010 - 12:01 | 569595 traderjoe
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Local university boosted tuition 14% two years in a row. Local health insurance up 15% this year. 

Wed, 09/08/2010 - 11:19 | 569464 DaveyJones
DaveyJones's picture

food inflation is not limited to the "wheat situation." It will continue to rise due to multiple factors not the least of which is the entire production delivery system which can not support the cost of oil and is breaking down. And throw in a little Monsanto seed market control and destructive soil and water practices for spicing.   

Wed, 09/08/2010 - 08:53 | 569148 breezer1
Wed, 09/08/2010 - 06:49 | 569036 pachanguero
pachanguero's picture

Robert,  I was just working in S. America, Colombia to be exact.  Run awat food costs.  It has started in the EM's.

Tue, 09/07/2010 - 23:32 | 568772 web bot
web bot's picture

So what's the problem? Just add it to the #uckin pile like we've done with everything else. That's the new normal.

I'm starting to get sick thinking of what's lurking around the corner. There is absolutely no end in sight. If current projections of economic growth are to be believed, we're looking at deficits into the next decade and paying out upwards of 40% of all revenues collected in the form of taxes as interest to debt holders within a handful of years. This is not going to end well.

A good article. Nice work.

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