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Muni Market Defaults Are Coming (Analyst Meredith Whitney is not crying wolf)
Forbes ^ | 01/15/2011 | Shah Gilani

Posted on 01/15/2011 7:47:49 AM PST by SeekAndFind

Meredith Whitney is not crying wolf. The analyst famed for correctly calling the implosion of banks and the ensuing credit crisis has been warning about defaults in the $2.9 trillion municipal bond market.

She isn’t the only one. Jamie Dimon, Chief Executive of J.P. Morgan Chase recently commented that there are significant problems facing munis and technical defaults have already happened. He ought to know. Big banks like his backstop billions of dollars of muni obligations with letters of credit that they may not want to renew.

The immediate, under-the-radar problem for the municipal bond market is that borrowers relied on banks to backstop their credits and lower short term funding costs when the credit crisis shut the door on auction rate preferred financing.

Call it a legacy issue.

While most municipal borrowings are long term, they still have short term obligations that need to be rolled-over. And although their ratings remained intact during the crisis, investors demanded higher interest on their loans to even the strongest borrowers. To keep borrowing costs from exploding, municipal borrowers sought big bank letters of credit as backstop guarantees on the shorter than they wanted variable-rate demand obligations they turned to.

According to Bank of America, $109 billion worth of different kinds of credit backstops and guarantees will be expiring in 2011. Reuters estimates that $53 billion of those guarantees are bank letters of credit.

Of course banks charge a fee for their letters of credit. But while they will likely increase the cost of their backstops significantly, no amount of fee income may be enough if they fear being left holding the bag on obligations that face potential default.

With municipalities and issuers of infrastructure bonds including schools districts, hospitals and sewage and garbage collection authorities facing diminished tax and revenue receipts

(Excerpt) Read more at ...

TOPICS: Business/Economy; Culture/Society; Government; News/Current Events
KEYWORDS: bonds; meredithwhitney; municipalbonds; munis

1 posted on 01/15/2011 7:47:55 AM PST by SeekAndFind
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To: SeekAndFind

Heard that the Munis are in danger due to the default possibility.

2 posted on 01/15/2011 7:51:29 AM PST by Marty62 (Marty 60)
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To: Marty62

You can count on it that they are.

I’ve been telling my best bud that a collapse in the muni market is how “it” begins.

3 posted on 01/15/2011 7:59:56 AM PST by bolobaby
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To: bolobaby

Long ago, financial novelest Paul Erdman penned a book wherein the complete lack of oversight in the Muni market
was a central theme. I believe the book was called Zero Coupon.

Paul passed on a few years ago and I miss his colorful insight into the financial markets. I love this paraphrase from an early book, early 80s, uttered by the central character: “I became uneasy about the stability of the financial markets when I figured out some guy in a tent in the desert could cause panic”.

4 posted on 01/15/2011 8:18:45 AM PST by Mouton
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To: SeekAndFind
One Huge Reason The Muni Meltdown May Never Happen

Taxes are seeing a v-shaped recovery. That's got to help.

From Deutsche Bank:

5 posted on 01/15/2011 8:19:57 AM PST by blam
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To: blam

That still looks more like a forecast than an actuality.

Let’s hope the strong-arming Obama administration and regulators don’t simply force the banks to continue to guarantee knowing bad muni debt—so the Fed can simply buy it up from them and push new money into the banks on the hook.

6 posted on 01/15/2011 8:29:57 AM PST by 9YearLurker
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To: SeekAndFind
Meredith is an idiot!

42,000 muni issuers.

Hundreds of Thousands of individual issues.

She thinks 1-200 will default!? Whoopdedoo! It will improve the muni market if we can wash the crap of the bottom of the barrel.

7 posted on 01/15/2011 8:58:34 AM PST by DCBryan1 (FORGET the lawyers...first kill the "journalists". (Die Ritter der Kokosnuss))
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To: SeekAndFind

Here is some lesser known muni-bond borrowers
school districts
water districts
authorities such as turnpike toll collecting authorities
conservation districts
Then of course you have the usual suspects such as
With hack politicians getting bribed to proceed with unnecessary bond offerings such as for school construction which my county went way overboard on due to contractors bribing school board members. Real bribes and campaign donations

I’ll be happy when the reckless entities are cut off from all borrowing by some muni-bond defaults

8 posted on 01/15/2011 9:04:08 AM PST by dennisw (- - - -He who does not economize will have to agonize - - - - - Confucius)
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To: SeekAndFind

Probably baby boomers that moved their stock holdings into a ‘safer’ investment will start cashing in those ‘safe investments’ in droves, and then some said bond issuers will become in a pinch, pay their on-going expenses or pay the debt.

9 posted on 01/15/2011 9:04:24 AM PST by Son House (The TEA Party is Going to Be Like a GI Party...Clean House!)
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To: DCBryan1
Meredith is an idiot!

42,000 muni issuers.

Hundreds of Thousands of individual issues...

Meredith has earned her, not so much.

As for the numbers of issuers...that indicates nothing.

The mortgage market was swamped, yet how many individual mortgages are outstanding?

It's a real concern.

10 posted on 01/15/2011 9:13:40 AM PST by gogeo ("Every one has a right to be an idiot. He abuses the privilege!" Groucho Marx)
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To: gogeo
Meredith has earned her, not so much.

I've had my Series 7 since she was in college....I just sold 475m 5% CA munis at 87.00....TEY of near 9%..

Long bonds are cheap, they need to be bought.

As for my "stripes".....LOL as I look at my hanger and plane this beautiful SAT AM. Think I'll go fly.

11 posted on 01/15/2011 9:26:34 AM PST by DCBryan1 (FORGET the lawyers...first kill the "journalists". (Die Ritter der Kokosnuss))
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To: SeekAndFind
James "Jamie" Dimon was born in New York City, to Theodore and Themis Dimon, and attended Browning School.[3]

Later, he majored in psychology and economics at Tufts University, before earning an M.B.A. degree from Harvard Business School along with fellow classmates Jeffrey Immelt and Seth Klarman.

Upon his graduation in 1982, Sandy Weill convinced him to turn down offers from Goldman Sachs,

[citation needed] where he worked the previous summer, and Morgan Stanley to join him as an assistant at American Express. Although Weill could not offer the same amount of money as the investment banks, Weill promised Dimon that he would have "fun".[citation needed]

In a power struggle, Weill left American Express in 1985 and Dimon followed him. The two then took over Commercial Credit, a consumer finance company, from Control Data, which became the vehicle that Dimon and Weill would use to propel themselves to the top of the financial world.[citation needed]

Through a series of unprecedented mergers and acquisitions, in 1998 Dimon and Weill were able to form the largest financial services conglomerate the world had ever seen, Citigroup.

Dimon left Citigroup in November 1998. It was rumored at the time that he and Weill got into an argument in 1997 over the perceived lack of promotion given by Dimon to Weill's daughter, Jessica M. Bibliowicz,[4]

although that happened over a year before his departure and most accounts cite many other more substantive issues as the real reasons.[5]

12 posted on 01/15/2011 12:11:11 PM PST by DontTreadOnMe2009 (So stop treading on me already!)
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