The Approaching Muni Bond Implosion

New York Lieutenant Governor Richard Ravitch made a statement last week that should have gotten headlines, but didn't.

“I believe that the states across the United States will face deficits a year after stimulus ends of $300 billion to $500 billion a year,” Ravitch told about 200 people gathered at New York University’s Robert F. Wagner Graduate School of Public Service. “You’re going to begin to see cracks in the municipal bond market well before then, because that’s an inexorable casualty of unfundable state deficits.”

To put this into perspective, the total state budgets for 2010 was about $1.4 Trillion. If his predictions are anywhere close to being true then the budget problems of the states are essentially unfixable.

“These are numbers that are unprecedented,” Ravitch said, adding that the current recession is unlike any in the nation’s history, with unemployment continuing to rise, “banks are falling like autumn leaves, and nobody is projecting any significant growth in 2010.”

The condition of state and local budgets are in their worst shape since the Great Depression, and if the economy doesn't turn around quicker than the mainstream believes, we are going to see defaults that will shake the economy to its foundation.
Only four months into the 2010 fiscal year, 26 states already have deficit problems totaling $16 Billion. This is after the states had to close $178 Billion of budget gaps this past summer. Only 22 states had budgets deficits of less than 20% of their total budgets. At least 9 states are projected deficits for 2011 of at least 20%, and those are often optimistic projections.
All the easy cuts have been made. Any new cuts will mean sawing into bone.

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The states have mostly closed the budget gaps through borrowing, and for now the market has responded well with strong demand. However, lately the sheer volume of supply in the three trillion dollar market is starting to drive up yields.

State and local government bonds have dropped almost 2 percent since Sept. 30, based on Merrill Lynch & Co.’s Municipal Master Index, which lost a record 5.1 percent in September 2008. At least four states -- Washington, Hawaii, Maryland and Minnesota -- have postponed or scaled back refinancing plans this month as benchmark borrowing costs rose the most since January as measured by the weekly Bond Buyer 20 index.

It used to be that the state and local governments didn't have to worry too much about yields. Just a few years ago they sold through the monolines. These insurance companies would back the municipal bonds with their AAA ratings for a small fee.
The monolines got their cut. The local governments sold their debt at low interest rates. Everyone was happy.

So what happened? The monolines got greedy. They weren't satisfied with their steady profits from the current business model. They wanted a piece of the subprime action. They started backing subprime mortgage-backed securities.
When the mortgages blew up, the monolines were forced to pay out larger and larger amounts on those losses. Eventually the monolines lost their AAA ratings, and now they no longer have a sustainable business model.

Since the insured municipal bond model has blown up the muni bond market has gotten much more volatile. In February the muni auction-rate bond market completely collapsed. This happened less than a month after monoline insurer Ambac was downgraded, along with all the bonds it insured.

From 1984 through 2006, only 13 auctions failed, typically because of changes in the credit of the borrower, according to Moody's Investors Service. There were 31 failures in the second half of 2007, and 32 during a two-week period beginning in January. That compares with more than 480 failures yesterday alone, according to figures compiled by Deutsche Bank AG, Wilmington Trust Corp. and Bank of New York Mellon Corp.

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Economist and author Frederick J. Sheehan recently wrote an article about the municipal bond market, and he didn't mince words.

The municipal market will probably repeat the pattern of the sub-prime collapse.
Some reasons for municipal collapse:

First, losses on investments will require much higher pension contributions. Estimates vary but some states and towns will need to increase their contribution by 50% or even 100% start ing in 2010 or 2011.

Second, spending has exploded. In New York City, the average compensation for full-time worker rose from $65,401 in 2000 to $106,743 - a 63% increase...

Third, accounting gimmicks are near an end. To meet booming expenses, many municipalities have engaged in questionable practices, such as selling property to meet current expenses...

Fourth, disclosure to municipal bondholders has been poor. Financial disclosure for municipal financing is not well enforced...

Even during the relatively good bubble years of pre-2007 the states and local governments spent more than they took in with taxes.

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Most people assume that muni bonds are safe from default. That's not true. Between 1970 and 2000 there were only 18 defaults on rated muni bonds. For instance, Cleveland in 1978 and New York a few years earlier. However, there were over 1,300 defaults on un-rated muni bonds during the same period.
Since the Great Depression is the comparison here, let's look at an example.

In 1933, the Iowa Supreme Court ruled the City of Dubuque was
required to meet its bond commitments. Kevin A. Kordana, a University of Virginia Law School professor, has written: “[T]axpayers promptly replaced the Iowa Supreme Court justices with ‘judges already committed to their anti-bond- holder viewpoint.’”24 A tangle in the federal courts followed which would require more
explanation than it is worth, but a headlinefrom the New York Times probably says all one needs to know about human tendencies in time of woe: “Iowa Farmers Abduct Judge From Court; Beat Him and Put Rope Around His Neck.”

In 1935 there were at least 3,252 municipal issues in default. It's worth noting that the bottom of the Great Depression was in 1933.




and if we believe Federal Government budgets are screwed up...well, just look at the CA insanity as a prime example in terms of cutting budgets effectively.

Midtowngs “got some spla’n to do"

Midtowngs “got some spla’n to do:

How do you reconcile your negative data (e.g. "the GDP of Stimulus") with New Deal Democrate who posted the following today:

“The October ISM Manufacturing Index report is out, and it's a blowout. This is as good as it gets, there is definitely a V shaped recovery in manufacturing underway.

Perhaps most importantly of all, for the first time in ages, employment actually grew, at 53.1 vs. last month's 46.2. Additionally, 20% of employers reported plans to hire workers, and 64% who planned on stable workforces, for a total of 84, vs. 15% who planned layoffs, for a net +4 in the index.

At no point during the 1992-3 and 2002-3 "jobless recoveries" did the ISM manufacturing index ever rise to 54 or above. A number above 54 has always meant job growth in the overall economy.”

Everything's been said

It's just a matter of watching the numbers now. New Deal is a true believer in the V recovery.
If it happens - great. I hope I'm wrong.
I don't think there's a chance in Hell that I'm wrong, but then I've been known to be wrong before.

"V" recovery

I'm sorry, the bus for a "V" recovery left the station a long time ago.

You cannot have protracted and increasing unemployment and claim a magic "V".

Seriously, what kind of slope is a V now supposed to be?

Let's see, if I wait 2 years and unemployment goes down, can I claim that's a V job recovery? I don't think so.

So, unless I've lost perspective on what "V" means, what a dramatic rate of change means, the entire "V" prediction is long gone and also plain wrong...

unless one wishes to turn a "|_______-" into somehow a "V"

But to me, one cannot say we're going to have a "V", 4 months, 6 months later, when clearly it is not a "V", then claim somehow a long time window compacts and magically creates a "V".

Every reasonable person wants to see the economy grow

and people back to work. I would only offer a quote from a Bloomberg article regarding today's numbers:

The ISM is a measure of the direction of improvement, not the degree, so don’t extrapolate that we’re partying like its April ‘06, but we are certainly better off than April ‘09,” Peter Boockvar, equity strategist at Miller Tabak & Co. in New York, wrote in a note to clients. - Financial Information for the Rest of Us.

It should be noted

As I understand it the ISM is only about manufacturing, which is about 15% of the economy.
Even this bump in the number can be largely attributed to the now defunct cash4klunkers program.

manufacturing, % GDP, % jobs

it's about 10% of total U.S. employment and has dropped dramatically, < 12% of total U.S. GDP.

Also, these cats who claim "productivity" and "technological advances" are the reason we've lost so many manufacturing jobs just completely ignore the mass exodus to cheap labor markets, like China.

But the report says auto manufacturing remained strong, after cash4clunkers. We'll see.

and then the services ISM is due out this week.

I believe (forget the implosion) the downhill slide in the U.S. is from manufacturing. It also spurs advanced R&D, all sorts of side job creation, i.e. the real economy, so seeing positive numbers like this is a very good sign, although we have a long way to go.

I believe just in a matter of a few years it's overall impact on U.S. GDP has dropped dramatically and needs to be increased.

New Deal

I just took a very rare visit to the Bonddad Blog. From what I can tell, New Deal is even more bullish than Bonddad. At least Bonddad voices concerns about where future growth is going to come from. New Deal shows none of that concern (that I've seen).
I'm going to just let things play out. Unless New Deal faces reality soon, he's going to discredit himself. That would be a shame.

a shame

earlier there were posts, in all caps no less, claiming Delong and Krugman were wrong on how many jobs needed to happen to claim a sustainable real recovery.

NDD has abandoned us, which is a shame and what this entire "V" thing is about, I'm unsure but ya know, I just hope none of us get too attached to outcomes on EP.

I've been dead wrong on gold and I fully admit it. My timing on gold has been serious screwed up. I thought it would hit a year ago, I was wrong on inflation with such beyond believe Fed financial commitments, a host of things...

but fortunately I didn't declare it all to be so in a blog post so I was having to eat my words. ;)

thank you etc.

Thanks to Midtowng and ‘the Rebel’ for your quick responses to my comment.

Midtowng, I feel a need to say that I type up my comments in Word and copy to the comment section. After I posted, I realized that I failed to copy the last one word line “Respectfully”. Reading my comment I fear it sounds a tad sophomoric. “You da’ man”

Back to economics, your point about the ISM being 15% of the economy is well taken. New Deal seems to be aware of this. He writes: “we still need to see what the ISM service index shows on Wednesday before we can dare to hope that Friday's October jobs number might actually print positive.”

More generally, all the contradictory economic talk points to how helpless the average worker is when it comes to ‘rationally’ affecting our economic well being. I am in a high percentile of education. However, I have no economic education and never bought stocks or bonds. I’m still mad that my bank took my passbook account away from me.

So how do I, and the rest of the working class rationally make an informed decision? It seems to come down to a guess – indeed ‘hope’. Or, frustration to the point of aggression.

I think the “Tea Parties” are not about this or that bill so much as venting shear frustration. Who can possible get mad at the content of these bills? No one reads them, and if they do they probably don’t understand them, and if they do understand them, the provisions change daily. So the aggression can best be explained by frustration resulting from the realization that participator democracy is an illusion and the opium of the people.

Thanks again.

unemployment "print positive"

The ISM is not current, it's future, so I sincerely doubt it would impact the upcoming unemployment reports so quickly.

You raise an important issue regarding education

particularly financial/economic education (an issue I care deeply about). I don't know how we compare to other countries but from the stats that I have seen we are pretty financially illiterate. And financial illiteracy, I believe, played a role in the financial crisis.

The problem as I see it is how can people make informed decisions if they don't understand the information they are provided. People have no way of knowing whether a source is credible or not. And that is what we are seeing today. It's a problem - just look at how many people follow ever word of certain radio talking heads who are multi-millionaires and who give a rat's ass about their listeners.

IMO, participatory democracy only works if we have an electorate that is educated, well informed and participates. It's in the best interest of certain powers that these 3 things remain absent. - Financial Information for the Rest of Us.

Financial literacy test

I think before anyone can take out any loan, credit card, there should be a national financial literacy test.

Seriously. We have them to drive cars, yet people who cannot read, cannot add two numbers together, do not understand the difference between 74% interest and 17% are allowed to be sold pretty much anything.

In high school, I don't recall even a basic class to teach people how to open a checking account or even write a check, never mind understand loan terms.

I'm sure the ACLU would be allow over that one as somehow discriminatory, but hell, is a driving license and test discriminatory?


Financial sector would hate that because it would

decrease the pool of potential customers that they can take advantage of. - Financial Information for the Rest of Us.

Self-Serving Financial Education Gurus

The sad thing about financial education is that there are many self-serving pundits writing books, articles, and blog posts, and teaching courses at local high schools and community colleges (not to mention putting on seminars at restaurants and hotel convention centers). Employers are even bringing in investment advisors to teach their workers how to diversify their 401(k) accounts. Some of these gurus are better than others, but I'm sure a lot of people try to educate themselves in good faith to make better investment decisions, only to lose their shirts in every financial downturn that comes along.

It appears to me that the masses are taught certain investment strategies just to make it easier to take them to the cleaners. I fear that even if we all started making the "right" decisions in lockstep with each other, we'd still just be prey for the bigger predators.

Yes, the "V" train has long ago left the station, forever

The chance to secure a seat on the "V" train left about a year ago.

That was when our government had a choice before it: Bail out the people, or bail out the very gangsters and banksters who caused the mess. Our government chose the banksters over the people, and we will pay for this folly for two generations.

When the crisis hit, there was only one workable solution - a complete society-wide revaluation of assets and bad debt write-off. The economy was a ponzi scheme were the last ones in were left holding the bag. And the last in were millions of mortgage, refinance loans and credit card balance holders. And instead of making them whole, our government chose to make the top of the pyramid whole.

All the major banks and casino houses needed to collapse, trillions in debt write-off needed to happen, and trillions needed to be poured into the social safety net to catch those that would fall due to the resulting depression. But then we could have cleared the books and moved on.

But instead Bernanke got out a giant air hose and inflated a new bubble to hide the popping of the last one. And now, as far as the eye can see, we'll have only Fed printing and government schemes ahead to hide the implosion.

That anyone can see a "V" shaped recovery, when we're at the heels of a global implosion to make the Great Depression look like a tea party, is amazing to me.

I could not believe it when I saw ...

..."print positive" in New Deal democrat's post at BB. I am still trying to understand if he actually meant a net increase in jobs. Not even the most optimistic economists surveyed by Bloomberg think so; the consensus range for Friday's BLS numbers run from 55,000 to 200,000. And ADP's reported net loss of 203,000 certainly doesn't presage anything positive when the government figures are released.

To be fair, NDd backed off on the jobs numbers in his post today, no doubt unbuoyed by the drop in the ISM service sector employment index and the lower than expected service sector growth index. 

I have been of the opinion for many months that we could see a V-shaped GDP "recovery" and that L____________-shaped job recovery. That, in fact, is exactly what a "jobless recovery" is all about.

In the past four recessions, the bounceback to pre-recession levels went like this:

1973-75 - GDP: 24 months; Jobs: 24 months

1981-82 - GDP: 24 months; Jobs: 28 months

1990-91 - GDP: 18 months; Jobs: 31 months

2001      - GDP:   6 months; Jobs: 47 months

If the current recession continues this split-trend, let me repeat what I've been saying for a year: we need a new definition of recession.









Not pretending to be an economist

Not pretending to be an economist

not sure where this came from

but the last post reneges on what he was saying earlier, which is a jobs "V" recovery, so this is new to claim he's now saying a GDP "V" (which also is various states of questionable, mainly because Q3 GDP is all about Stimulus effects) with a "L" jobs. This is assuredly new. I also don't recall him calling for a new definition of recession.

What I would like to know about, at the moment, is have jobs dissipated in being offshore outsourced, for the trend lines in "jobless" recovery, esp. 2001 there was a mass exodus of jobs and has been for a decade. Evidence that manufacturing has shrank down to 12.2% of GDP and also STEM (techie jobs) total jobs has shrank.

I'm placing bets the unemployment rate comes in at 9.97% and that will be due to some falling off the rolls, no longer counted. That magic 10% is political dynamite so I think we will see "resistance" to the magic 10% if manipulation possible. ;)

This one I'm not so sure because so many of these jobs are due to the consumer going bust.


A major post on munis elicited only one comment on munis and lots of drivel. Does no one invest in them or live in a city or state in the US which needs them to survive??????



As one of the ‘drivelers’ criticized by ‘Anonymous Drive-by” (11/5 20:06), I feel a need to respond, especially since midtowng seems to agree as evidence by his 5 rating of the comment.

To start with I remember back in (I think) the 1970’s when for at least weeks perhaps months (at least it seemed like months) day in and day out the lead story and analysis of mass media (that was the only media in those pre internet days) was “Is New York City going to go bankrupt?” Of course it did not. Later there was the hue and cry, fear and trembling, about Savings and Loans Banks going bankrupt

Moving along, for the past year one of the major items in mass media and bogs has been the possible bankruptcy of various financial institutions, automobile companies and the state of California. Well some did and most didn’t and maybe more will. But, we keep rolling along.

I wonder if “anonymous drive-by” and “midtowng” ever heard the morality tale of “The boy who cried wolf.” That pretty much explains my ‘oh hum’ response about another tale of bankruptcy. It may or may not come and if it does, I’m not sure what will be the consequences. Will public schools close, police forces disband, taxes raised (as Sharonsj reports from PA). Will there be a revolution (as Sharonsj is hoping for)?

Frankly, I don’t know what to think or say about another “predicted bankruptcy. So I just Drivel to past the time.

Meanwhile, “Anonymous Drive-by” I would be interested in reading what your thoughts are about Munis. Feel free to jump in – if nothing else, as you know, this blog welcomes drivel.

Not drivel

but tangents.
I wouldn't use the term "drivel" as Anonymous did, but many of the comments weren't directly related to the topic at hand. It wasn't a judgment on the comments, merely an agreement that the topic at hand wasn't being recognized for what it was.
That's why I gave the comment a 5.

munis defaulting

Several municipalities have declared bankruptcy already. No jobs and falling home values = less revenue for the tax collectors. So what are the states doing? Raising taxes. Here in Pennsylvania I've heard my school taxes may double to pay for government pensions. Meanwhile, it took our moronic state legislators months to agree on a budget that slashes services. So I'm going to have to pay more to get less. How long do you think it will be before fed-up Americans revolt? Soon, I hope.

Just how bad is the state budget situation?

It's epic. It's catastrophic. I just don't think people realize how bad its going to get. But some people do.

"We're facing a cliff in 2011 when stimulus dollars run out," said Mitchell Bean, director of the Michigan House Fiscal Agency. "There is not an end in sight, even in recovery."
As of July 2009, California's budget shortfall was 49.3% of its general funds. States have considered drastic options to fill such gaps.
"I looked as hard as I could at how states could declare bankruptcy," said Michael Genest, director of the California Department of Finance who is stepping down at the end of the year. "I literally looked at the federal constitution to see if there was a way for states to return to territory status."

All this happy talk about Green Shoots and Recovery has lulled people into believing that the worst is over. Maybe in some areas it is, but none of those areas involve state and local budgets.

Mr. Genest estimated that, eventually, 40% of the state's budget would go to the state Medicaid program, 40% to education, 10% to debt service and 6% to retiree medical services and pension—leaving little left for anything else, such as the state's corrections system.
"Citizens don't quite understand yet the implications of some of the cuts that we've made," Mr. Bean said. "A lot of it has fallen on local governments. I am very concerned that we're going to have a lot of insolvencies in local governments."

not I

Previously I've been in the "L" camp, but now my "L" looks like this:


In other words, because we have a government run by multinational corporations, we are not getting the legislation and policy to it's the continuing slide that has been going on for some time but I'm thinking all of these events will compound the long term slide to cause it to have a higher downward slope.

I'll bet $5 bucks that this "jobs summit" will be more B.S. and not the structural changes needed.