As you may have heard, Meredith Whitney has lately been saying that we’re going to be looking at the scariest environment imaginable when as many as 50 to 100 cities and other municipal issuers will supposedly default on their debt this year. Charlie Gasparino, however, is suspect. No one he knows has seen a copy of Whitney’s report (entitled “State Budgets: The Day of Reckoning”) and until he gets a peak and can evaluate it, Chaz doesn’t think we should be buying what this broad is selling. Continue reading »
municipal bonds
The crisis in the auction rate securities market continued this week. While some issuers are preparing to refinance auction rate securities that have the highest interest rates, the suddenly turbulent market for muni bonds may leave many investors stuck in their illiquid positions.
“About 61 percent of auctions failed to attract enough bidders yesterday, in line with the average since mid-February, according Bloomberg.
The recent rally in the muni market, however, may make it easier for ARS issuers to refinance the products. Many auction rate securities are issued by government agencies. In order to repurchase the securities from investors, these agencies would likely have to issue plain-vanilla municipal bonds.
Accrued Interest has a good discussion of the breathtaking rally.
“On Monday, retail buyers (i.e., mom and pop investors) started coming out of the woodwork to buy bonds,” he writes. “The State of California came with a $1.7 billion deal on Monday. Demand was so strong that the underwriter cut the interest rate by 15bps across the board, and still $1 billion of the deal was done retail. Now maybe there has been $1 billion of a deal done retail in the past, but I sure as hell don’t remember ever hearing of such a thing. Smith Barney, Citigroup’s retail brokerage arm, supposedly had the best day for selling municipal bonds in their entire history on Monday. One large dealer I talk to regularly said they had sold every bond in their inventory by 11AM.”
Munis Rally as Highest Yields Since 2004 Lure Buyers [Bloomberg]
Municipal Bonds: Yeeeeaaaaahooooooo! [Accrued Interest]
We get called contrarian often enough that we’re nearly resigned to the label. From our perspective, of course, we’re not contrarians at all. We’re so deficient when it comes to having a decent respect for the opinions of mankind that we aren’t even aware of the prevalence or rarity of the positions we take. If we seem contrarian, we suspect it’s just because so many others are wrong so often.
The debate over municipal bond ratings is a good example of this. Over at Portfolio—published out of an august tower located in Times Square—they are convinced that Moody’s, Fitch and the like assign ratings that are too low to municipal bonds. This supposedly forces our towns, cities and states to pay higher interest rates or purchase bond insurance to achieve higher ratings. Jesse Eisinger, who holds the esteemed title of Senior Writer at Portfolio, estimates that this costs municipalities around $5 billion a year.
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Posted in:
Bond Insurers
Is Muni Bond Insurance A Racket?
The Portfolio Gang Responds!
By John Carney
Although it looks like MBIA is now out of the woods, rival bond insurer Ambac’s fate is still murky. Reports indicate that the ratings agencies are now considering the rescue plan worked out by banks and state insurance regulators. The plan may be revealed as early as this week, and will probably involve splitting Ambac in two to segregate the municipal bond insurance business from the less healthy business of insuring riskier credit products.
Last week Holman Jenkins pointed out that segregation is unfair to customers who bought insurance on CDOs because it would “retroactively award municipal clients privileged status at the expense of other clients with equal claim on the insurers.” Bill Ackman, who has been shorting the bond insurers for years, raised a similar point. Indeed, Jenkins expects that the policy holders left with guarantees from the suddenly even more precarious side of the business will launch lawsuits to prevent the break-up.
There’s also a much stranger objection to the segregation plan, one stemming from an objection to the very existence of municipal bond insurance. We first heard about it in Portfolio, of all places. In the latest issue Jesse Eisinger argues that municipal bond insurance is a scam, and it’s victims are municipal governments. This will no doubt come as a surprise to state regulators and treasuries who have been on knife’s edge fearing that the collapse of the bond insurers would make raising money costlier or, in some cases, perhaps impossible. If the governments are the victims here, why exactly are they working to keep the victimization going?
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Posted in:
Bond Insurers
How To Think About Municipal Bond Ratings
And Why The Critics Of Muni Bond Insurance Are Wrong
By John Carney
The bond insurers have all rocketed today on the expectation that a bailout from the banks will be announced any time now. But this has hardly tempered the words of their critics. Everyone from Bill Ackman to Warren Buffett has criticized bond insurers for guaranteeing complex derivatives whose underlying risk they seem not to have understood. Even the core business of the insurers—guaranteeing municipal bonds—has come under fire.
In this month’s Portfolio, writer Jesse Eisinger argues that bond insurance is a racket, basically a tax-payer rip-off carried out by the collusion of bond insurers, Wall Street firms and credit rating agencies. It s a pretty extraordinary claim, for which Eisinger offers no real evidence other than the allegations of a Attorney General who hopes to be the next Eliot Spitzer and a claim that the ratings agencies consistently assign municipal bonds ratings that are too low.
