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Why Detroitís Bankruptcy Could Detonate a $3.7-Trillion Muni Bond Bomb
Wall Street Daily web ^ | July 24, 2013 | Louis Basebese

Posted on 07/24/2013 10:26:53 AM PDT by publius911

The first officially recorded municipal bond was issued by the City of New York for a canal in 1812. It was a general obligation bond, meaning the city pledged every available resource – most notably, tax revenue – to repay the debt. So, in theory, unless the city lost its legal ability to levy taxes, which it never would, investors would be repaid...

If Orr succeeds, look for all hell to break loose. Just like we witnessed during the real estate collapse when homeowners started walking away from their mortgage obligations without any recourse, other cash-strapped municipalities are destined to follow Detroit’s lead and try to renege, too.

(Excerpt) Read more at wallstreetdaily.com ...


TOPICS: Business/Economy; Crime/Corruption; Government
KEYWORDS: bonds; detroitbankrupcy; munibonds
Municipal bonds have an unbroken history of complete trust for over 200 years. If this works, head for the financial bomb shelters!
401(k)s and IRAs? Forget it.
Everybody will be hit big time.
Everybody, that is who has actually worked in the privare sector 30, 40 50 years...
1 posted on 07/24/2013 10:26:53 AM PDT by publius911
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To: publius911

“401(k)s and IRAs? Forget it.”

Can you say in terms of what? Will this be the ‘crisis’ that will enabe the Treasury to confiscate everyone’s retirement $$, or do you mean we can kiss 80% of the value good-bye?

Or both?


2 posted on 07/24/2013 10:35:12 AM PDT by MichaelCorleone (Jesus Christ is not a religion. He's the Truth.)
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To: publius911
It will be bad, but not as bad as that..you're going to see munis reorganized into several classes, by risk..the lower tranches will be toxic.

The GOOD news is that Detroit, and other entities that won't back their bonds, will NOT be able to borrow, period, even at rates that would make a loan-shark blush. Detroit will have to operate on a cash basis balanced budget, and the cuts to achieve this will be brutal.

The most immediate casualties, IMHO, will the the insurance companies that have made a fortune "insuring" municipal bonds. Those "guarantees" will prove to be worthless..many of them will fail..

3 posted on 07/24/2013 10:35:34 AM PDT by ken5050 (Due to all the WH scandals, MSNBC is changing its slogan from "Lean Forward" to "BOHICA")
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To: MichaelCorleone
Can you say in terms of what? Will this be the ‘crisis’ that will enable the Treasury to confiscate everyone’s retirement $$, or do you mean we can kiss 80% of the value good-bye?

The complete article at the link explains the problem in detail; Many retirement accounts are heavily into Bonds, traditionally the safest investment.
If Detroit succeeds in defaulting on all its bonds, they wont be worth squat. Both present and future.
Nationwide.

4 posted on 07/24/2013 10:43:58 AM PDT by publius911 (Look for the Union label, then buy something else.)
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To: publius911
In my opinion this is a hugely important article. This is why Obama does not want to bail out Detroit. They want capital to flow away from those he deems “rich people” (bondholders).

It is all part of his twisted “spread the wealth around” plan.

He did the identical thing with GM. He screwed the bondholders with cents on the dollar. Many good hardworking people had their savings in GM bonds and they were screwed.

The same thing will happen here.

I would be very careful with municipal bonds right now. It could be SHTF time for these once solid investments as the liberal cities start to fall one by one.

5 posted on 07/24/2013 10:47:15 AM PDT by Gabrial (The nightmare will continue as long as the nightmare is in the Whitehouse.)
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To: ken5050
The GOOD news is that Detroit, and other entities that won't back their bonds, will NOT be able to borrow, period, even at rates that would make a loan-shark blush. Detroit will have to operate on a cash basis balanced budget, and the cuts to achieve this will be brutal.

A balanced budget!
What a concept!

Why hasn't anyone thought of this before?

< /sarc >

6 posted on 07/24/2013 10:49:27 AM PDT by publius911 (Look for the Union label, then buy something else.)
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To: publius911

Looks like Wall Street is beating the drums of national collapse unless gov bails the cities (bondholders) out with taxpayers money again??!!!!! If anyone has been buying Detroit bonds they deserve to face default.


7 posted on 07/24/2013 10:52:12 AM PDT by Fee
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To: publius911

Thanks for responding. I unfortunately could not access the link as I am not on my usual pc (just so you don’t get the impression I was simply being lazy)


8 posted on 07/24/2013 10:54:57 AM PDT by MichaelCorleone (Jesus Christ is not a religion. He's the Truth.)
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To: publius911

A little rational thought will focus the discussion on reality.

The bonds can not be repaid if there is no revenue.

If there is to be a new city, all traces of the old must be eliminated. The new must be new. That which is old....cops, teachers, bureaucrats, water depertmants etc must be scrapped. A governor’s viceroy must be appointed to replace all the junk, both people and institutions.


9 posted on 07/24/2013 10:57:11 AM PDT by bert ((K.E. N.P. N.C. +12 ..... Travon... Felony assault and battery hate crime)
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To: publius911
I take solace in the fact that the idle rich have invested heavily in munis so I suppose our federal govt will never let the big people suffer...

what do I care anyway.....hubby and I have worked our whole lives to arrive at a point where retirement won't be easy, where every dollar we have is targeted by the govt, where every other penny will have to go to pay for health care....

sell the house the buy a small motor home and just travel, fish, enjoy...

10 posted on 07/24/2013 10:58:58 AM PDT by cherry
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To: Gabrial
“He did the identical thing with GM. He screwed the bondholders with cents on the dollar. Many good hardworking people had their savings in GM bonds and they were screwed.”

Yeah, and nobody batted an eye, either. If Forbes, CNBC, Bloomberg, the WSJ, et. al., make a real stink back then, maybe they'd think twice before doing this.

11 posted on 07/24/2013 11:00:30 AM PDT by MichaelCorleone (Jesus Christ is not a religion. He's the Truth.)
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To: ken5050
“The most immediate casualties, IMHO, will the the insurance companies that have made a fortune “insuring” municipal bonds.”

hmmmm...had not thought about that...glad I don't have any stock in insurance companies right now. I had been thinking more of the existing bondholders getting screwed.

Just out of curiosity, what is your take on the student loan bubble created by Obama’s land grab of the student loan industry?

12 posted on 07/24/2013 11:02:57 AM PDT by Gabrial (The nightmare will continue as long as the nightmare is in the Whitehouse.)
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To: Gabrial
In my opinion this is a hugely important article. This is why Obama does not want to bail out Detroit. They want capital to flow away from those he deems “rich people” (bondholders). It is all part of his twisted “spread the wealth around” plan. He did the identical thing with GM. He screwed the bondholders with cents on the dollar. Many good hardworking people had their savings in GM bonds and they were screwed. The same thing will happen here. I would be very careful with municipal bonds right now. It could be SHTF time for these once solid investments as the liberal cities start to fall one by one.

Careful what you wish for...

Watch for "Obamabonds" similar to Savings Bonds backed by the "Full faith and Credit of the United States" and bought through Uncle Sugar and they are the gate keeper for Detwaa, Baltimore etc rather than a Brokerage House and a Ratings Agency. Rather than buy Muni's themselves, ( yes many in these communities with modest savings could buy a nominal amount ) they will do so because Dear-Leader says so, and they will make it easy, imagine buying these mini-munis through your Union....

Imagine if they can get a cash stream again without having to worry about their "rating" and the Accounting Equation and those pesty things called Liabilities...

13 posted on 07/24/2013 11:05:02 AM PDT by taildragger (The E-GOP won't know what hit them, The Party of Reagan is almost here, hang tight folks.....)
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To: Fee
If anyone has been buying Detroit bonds they deserve to face default.

Detroit is just the biggest and the most visible. Add corruption, featherbedding and crony-ism and it is just the usual irresponsible ignorant no-brain people getting elected --- on steroids.

From California to Maine, deficit spending and the ease of borrowing coupled with ignoramuses who stay around three, five, ten terms and then retire to some warm pleasant place and let some other suckers take the heat when TSHTF.

Most visible and obvious about this mess is that most people just haven't a clue that 30-year bonds ACCUMULATE.
When the retarded, elected idiots are also corrupt, this is the only possible outcome.

I hope I never again hear that most stupid of spurious arguments, It's only a temporary half-cent tax!

That I haven't mentioned the "public service" unions is not an accident. They are the major component of this mess, but by no means the only one. I just don't want to get started on that.

14 posted on 07/24/2013 11:06:36 AM PDT by publius911 (Look for the Union label, then buy something else.)
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To: ken5050

The experience of Greece suggests that the bond-insurers will find a way to avoid paying that which they have contracted to pay.


15 posted on 07/24/2013 11:06:43 AM PDT by DuncanWaring (The Lord uses the good ones; the bad ones use the Lord.)
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To: publius911

If cities have a taxable base and assets it must convince a Fed judge that it absolutely cannot honor its bond obligations. It is not that easy to walk away. Bondholders and underwriters are suppose to analyze the cities accurately before they underwrite and/or buy the bonds. Meredith Whitney actually broached this subject several years back about how muni bond firms to not accurate audit and determine the ratings of cities and cities were committing fraud by budget shell games and misreporting data. Lack of monitoring and business as usual by the muni bond firms, and selling worthless high risk bonds as AAA paper game is afoot again. People who buy Detroit bonds, what are they thinking???!!!! A lot of powerful muni bond firms on Wall Street don’t want this issue expose that many of the “AAA” bonds they have been peddling have not been audited for many years and sold to investors, pensions and etc. Today there are too many broke local, county and state govs.


16 posted on 07/24/2013 11:07:31 AM PDT by Fee
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To: bert
If there is to be a new city, all traces of the old must be eliminated. The new must be new. That which is old....cops, teachers, bureaucrats, water depertmants etc must be scrapped. A governor’s viceroy must be appointed to replace all the junk, both people and institutions.

What are you smoking?
Good luck with that.

...Maybe that's the reason the feds have cornered the ammunition market??

17 posted on 07/24/2013 11:09:46 AM PDT by publius911 (Look for the Union label, then buy something else.)
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To: taildragger
Shhhhhh....

Please don't give these whack jobs any ideas....

I was in New York a while back and an investment banker was giving me some statistic that something like 45% of all employed Americans are now living paycheck to paycheck with 0 savings.

I may not be remembering that stat properly, but I remember it scared the crap out of me.

18 posted on 07/24/2013 11:16:26 AM PDT by Gabrial (The nightmare will continue as long as the nightmare is in the Whitehouse.)
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To: taildragger
Imagine if they can get a cash stream again without having to worry about their "rating" and the Accounting Equation and those pesty things called Liabilities...

Best news I've heard all year!

Imagine all the "public service" unions bankrupted in one fell swoop!

Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha !

19 posted on 07/24/2013 11:20:00 AM PDT by publius911 (Look for the Union label, then buy something else.)
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To: publius911
On the wire today...

“A state appeals court on Tuesday (7/23/13) put on hold Judge Rosemarie Aquilina’s legal challenge to Detroit's bankruptcy, clearing the way for a federal judge to begin reviewing the city's filing.”

That sound you here are the bulkheads collapsing...she's goinjg down.

20 posted on 07/24/2013 11:35:13 AM PDT by Gabrial (The nightmare will continue as long as the nightmare is in the Whitehouse.)
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To: Gabrial

dang cell phone...either my fingers are getting bigger or the buttons are getting smaller


21 posted on 07/24/2013 11:36:56 AM PDT by Gabrial (The nightmare will continue as long as the nightmare is in the Whitehouse.)
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To: Gabrial

Then to, there is mind fog, lapse of concentration induced by age


22 posted on 07/24/2013 11:39:26 AM PDT by bert ((K.E. N.P. N.C. +12 ..... Travon... Felony assault and battery hate crime)
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To: publius911

Why not have a sheriff’s sale of every city owned asset to pay off bond holders? I would start with city hall and empty it of desks, computers etc. leaving just enough stuff to maintain essential services. Let city bureaucrats use cardboard boxes for desks or sit on the floor.


23 posted on 07/24/2013 11:46:55 AM PDT by The Great RJ (construction)
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To: publius911

It may happen faster than we think. Just the threat of possible muni haircuts may well dry up the market for munis, and then the cities have nowhere to go for the funds they need to keep up the huge pensions they owe.


24 posted on 07/24/2013 11:57:25 AM PDT by expat2
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To: The Great RJ
Why not have a sheriff’s sale of every city owned asset to pay off bond holders? I would start with city hall and empty it of desks, computers etc. leaving just enough stuff to maintain essential services. Let city bureaucrats use cardboard boxes for desks or sit on the floor.

In a sane world what you have suggested would happen.

25 posted on 07/24/2013 12:05:39 PM PDT by jdsteel (Give me freedom, not more government.)
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To: expat2

I don’t see a complete muni-bond melt down due to the Detroit situation, let alone a full bond market collapse. Insurers and lenders, many of them foreign, took big risks on Detroit to get better returns. Looks like they lost, but most US cities and towns are not in the same desperate straits as Detroit. There will be losses, and a restructuring of the bond market - but that’s a good thing if it brings discipline and restraint. Lenders and insurers will start looking at political subdivisions with a more critical eye, charging premiums for the profligate, and, one would hope, reigning in the unending desire to spend other people’s money. (Cue Monty Python)Always look on the bright side of life ....


26 posted on 07/24/2013 12:23:31 PM PDT by Old North State
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To: publius911

I guess this means that Whitney gal wasn’t so looney after all!!

Wonder if CNBC would let her back on? Lots of folks on there made several snide remarks about her.


27 posted on 07/24/2013 12:30:43 PM PDT by biff (WAS)
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To: bert

“If there is to be a new city”

So would that be “New Detroit”? You know, like in RoboCop? Who knew at the time how prescient that movie really was!


28 posted on 07/24/2013 12:40:03 PM PDT by catnipman (Cat Nipman: Vote Republican in 2012 and only be called racist one more time!)
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To: taildragger

“Watch for “Obamabonds” similar to Savings Bonds backed by the “Full faith and Credit of the United States””

Subsequently followed by forced conversion of all assets in all 401K and 403B accounts to ObamaBonds.


29 posted on 07/24/2013 12:41:33 PM PDT by catnipman (Cat Nipman: Vote Republican in 2012 and only be called racist one more time!)
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To: Old North State
The problem is that a couple of years ago, Detroit was listed as only the 9th most likely to default. More likely were:
Philadelphia,
Chicago,
Boston,
Cincinnati,
St. Paul,
Jackonsville,
New York City,
Baltimore.

Detroit was supposed to be able to hang on until about 2023 but......

The fact that it will now be harder for cities to sell bonds is going to make them more likely to have to default. You are right about discipline and restraint, but that is not politically possible without declaring bankruptcy first.

30 posted on 07/24/2013 2:26:48 PM PDT by expat2
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