rocky

My 2008 Predictions for Financial Catastrophe

I will vote for an as yet unnamed Libertarian or independent candidate before I vote for Hilary. The writer is correct, she has very high negatives. I hope Michael Bloomberg runs and spends some of his millions trying to educate the public about the financial problems facing the US government and state/local governments as well.

I'm Out of Closed-End Muni Funds - For Now

Many municipalities are going to have major problems honoring all their commitments to their public employee pension funds in a few years (including post retirement medical benefits). Don't be surprised if some issuers have to file for bankruptcy protection. Orange County, CA has retained law firms to see if it has grounds to invalidate its pension commitments, especially to recent public safety retirees. In Orange County, a sheriff's deputy with a lot of overtime in his final year of service can retire at age 50 and 30 years service with a pension of 90% of final year compensation. So if a deputy racks up $100,000 in overtime pay in his final year, he could easily qualify for a pension of $150,000 for life plus medical benefits. Even in Disneyland, that's a lot of money.

Muni Bond Holders: Don't Lose Sleep Over Insurance Guarantee Failure

If your bonds are backed by property taxes or an essential revenue stream such as water charges, I wouldn't worry about the bonds. They probably didn't need the insurance to begin with, but a lot of buyers were willing to pay higher prices (accept lower interest rates) for insured bonds so the bonds were insured. On the other hand, if your bonds are backed only by lease payments to be made by a financially weak city that you would not want to live in, you have more to worry about. If the retirement system for public employees is not fixed in California in a few years, I could easily see some California issuers defaulting on their lease bonds (certificates of participation) down the road.

An In-Depth Look at Municipal Bond Insurance

As I recall from my days on a bond trading desk, the major bond insurance companies have risk to capital ratios of close to 150:1. Even when unearned premiums and other reserves are taken into account, it doesn't take many defaults for an insurance company to go bust. In the good old days, the majors stuck to insuring mostly investment grade bonds that were not in much risk of defaulting. FGIC reportedly had the highest standards. Not any more. Too bad the companies ventured into exotic mortgage instruments and who knows what else. While a 150:1 risk to capital ratio was adequate for insuring investment grade munis, the standard did not change as the risks increased. Too bad for investors relying on muni bod insurance to sleep nights.