When Anything Can Fail: Seeing the Unthinkable Happen

Dec.26.10 | About: BlackRock Municipal (BBK)

You may have heard about or read about the city in Alabama that has run out of money to pay it's pensioners. Per the article, this affects 40 people although the number is larger if you factor in spouses and that a few of them may have family circumstances where they care for a parent or maybe a special needs child.

This may be difficult to remember but a few years ago the idea of a public pension being unable to make payments would have been unthinkable. Fannie (OTCQB:FNMA) and Freddie (OTCQB:FMCC) going under, for all intents and purposes, was also unthinkable. Merrill Lynch is no longer a public company. There is now a debate about how many municipalities will fail. There is also a debate about how many countries in Europe will go down.

Before the financial crisis started, I commented several times that Enron and Worldcom showed us that anything can fail; anything. Candidly I did not have municipalities and European countries in mind but they do fit the description of anything.

The last ten years has been a lesson in seeing the unthinkable happen or come much closer to happening than people would have ever thought and the above does not take into account issues in the US at the Federal level (debt and entitlements). It would be very easy to out-debate me on this but I cannot envision a scenario where entitlements as we now know them don't change radically. Or should I say painfully?

The solution (pain) could include means testing, reduced benefits for everyone or something else. In the article linked above, the town in Alabama may reduce benefits from $3000 per month to $200 with someone quoted in there that this would not be a haircut but a scalping. Obviously I do not know how this will play out and of course we lack the political will to do anything difficult, but something will have to give at some point and people will get caught completely off guard and consequently will be hurt just like anyone in Prichard, AL relying on $3000 per month looking down the barrel of a $2800 pension cut.

Disclosure: No position