Why Detroit’s Bankruptcy Could Detonate a $3.7-Trillion Muni Bond Bomb

Wall Street Daily web ^ | July 24, 2013 | Louis Basebese

[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.

[Gabrial]

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

[bert]

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

[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.

[expat2]

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.

[jdsteel]

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.

[Old North State]

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 ....

[biff]

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.

[catnipman]

“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!

[catnipman]

“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.

[expat2]

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.