Senior SEC Employee Warns of Potential Municipal Bond Market Collapse

[CrackSmokeRepublican]

Caught this over at DBS's website  http://www.iamthewitness.com/  more "S" is hitting fan. Bookstaber, a jew, is pretty much telling everybody the obvious truth... I bet 100% that the Washington, D.C.'s/NY's  JewEstablishment in Economics is extremely worried their Shylock operations are going to get them kicked out of the US. --The CSR


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Senior SEC Employee Warns of Potential Municipal Bond Market Collapse

http://www.economicpolicyjournal.com/20 ... ntial.html

Tuesday, April 6, 2010
Senior SEC Employee Warns of Potential Municipal Bond Market Collapse

Rick Bookstaber, who is a a Senior Policy Advisor to the Director of the SEC, Mary Schapiro, continues to maintain his own private non_SEC affiliated blog.

Prior to joinning the SEC, Bookstaber served as the managing director in charge of firm-wide risk management at Salomon Brothers, director of risk management at Moore Capital Management, and Morgan Stanley's first market risk manager. He is the author of three books and a number of articles on finance topics ranging from option theory to risk management, and has received various awards for his research. He holds a Ph.D. in Economics from the Massachusetts Institute of Technology.

On his blog he writes that he doesn't think:

    ...we will see a big crisis emerging for some time in banks, hedge funds or derivatives, mostly because, like with a knockout punch, the risks that matter don't come from where you are looking...

He is not so sanguine about the municipal bond market:

    So, where to look next. To see other potential sources of crisis, let's first recount the lessons learned from this crisis:

    1. Problems occur when things get leveraged and complex (and thus opaque).
    2. If the problems occur in a very big market, especially in a very big market like housing that is tied to the credit markets, things can go systemic.
    3. The notion that you can diversify by holding a geographically broad-based portfolio, ("there has never been a nation-wide housing recession"), works fine – until it doesn't.
    4. A portfolio that is apparently hedged can blow apart. So we have to look at the gross value of positions, even if they are thought to be hedged.
    5. Don't bet on ratings, because rating agencies are conflicted and might not be all too dependable at their job.
    6. Defaults are never easy to manage, but it gets worse when there are a lot of them happening at the same time. It is harder to manage the mess, and there is less of a stigma in defaulting. And it is all the worse when, as is the case in the housing markets, those defaulting are not businessmen. As an added complication, with housing the revenue that we thought was there really wasn't. Income that was supposed to be there to finance the mortgages – even when that income was fairly stated – became committed to other areas (like second mortgages). .

    Well, guess where we have a market that is (1) leveraged and opaque, that is (2) very big and tied to the credit markets; and is (3) viewed by investors as being diversifiable by holding a geographically broad-based portfolio; with (4) huge portfolios where assets and liabilities are apparently matched; and with (5) questionable analysis by rating agencies; and where (6) there are many entities, entities that may not approach default with business-like dispatch, and that have already mortgaged sources of revenue that are thought to support their liabilities?

    Answer: The municipal market.

    Leverage and Opacity. Leverage in the municipal market comes from making future obligations to employees in order to pay them less now. This is borrowing in the form of high pension benefits and post-retirement health care, but borrowing nonetheless. Put another way, in taking lower pay today, the employees have lent money to the municipality, with that money to be repaid via their retirement benefits. The opaqueness comes from the methods of reporting. For example, municipalities are not held to the same standards as corporations in their disclosure.

    Size and potential systemic effects. That this is a big market in the credit space goes without saying.

    Diversification. Geographic diversification would give a lot more comfort for municipals if it hadn't just failed for the housing market. Think of why housing breached the regional barriers. It was because similar methods of leveraging were being employed through the country. So the question to ask is: Are there common sorts of strategies being applied in municipalities across the nation?

    Gross versus net exposure. The leverage for municipals is not easy to see. It might appear to be lower than it really is because many, including rating agencies, look at the unfunded portion of these liabilities. They ignore the fact that these promised payments are covered using risky portfolios. And not just risky -- the portfolio might apply hefty (a.k.a. unrealistic) actuarial assumptions of asset growth.

    Rating agencies. In terms of the work of the rating agencies, here are two questions to ask. First, list the last time they did an on-site exam of the municipalities they are rating. Second, are they looking at the potential mismatch between assets and liabilities, or simply at the net – the under funded portion of the portfolio.

    Defaults. Municipalities are not quite as numerous as homeowners, but there certainly are a lot of them. And they have the same issues as homeowners. Granted, they will not pour cement down the toilet before walking away. But they have a potentially equally irrational group – the local taxpayers – to deal with.

    Oh, and just as homeowners took their income and locked it up via secondary loans, much of the tax base for municipalities is already mortgaged, through the sale of tax-related revenues streams like tolls and parking fees. Indeed, although general obligation bonds are considered the cream of the crop, they might just as well be regarded as the residual claim after anything with solid fee streams has been sold off.

    Once a few municipalities default, there is a risk of a widespread cascade in defaults because the opprobrium will be lessened, all the more so if the defaults are spurred along by a taxpayer revolt – democracy at work.


Well, he's a government employee, so you have to expect the shot he takes at the end, against taxpayers who revolt, but otherwise the analysis, itself, of the municipal market is strong. No one knows how many landmines are planted ready to be stepped on. Those investing in municipal bonds to get a tax break on interest earned may find out they are going to end up with a capital loss tax break instead, and no interest income at all.

Posted by Robert Wenzel at 11:42 AM

[abduLMaria]

Interesting name.

now if we could just convince all Zionists to change their last name to "Backstabber", they'd be easier to keep track of.

[CrackSmokeRepublican]

Here's a Bloomberg recap... the timing of this and Taibbi's new Rollingstone article is interesting... I wonder if they are trying to "cap" Taibbi with their own J-Tribe insider "spins" :

Next 'Big Crisis' Is Unfolding in Muni-Bond Market: Joe Mysak

Commentary by Joe Mysak

April 9 (Bloomberg) -- Look to municipal bonds for the next big disaster.

That's the advice of Richard Bookstaber, a senior policy adviser at the Securities and Exchange Commission.

Writing on his blog this past week, Bookstaber said the next big crisis looked a lot like the last big crisis, in housing and credit.

Conditions in the municipal-bond market match almost exactly the conditions that existed for the blowup that sparked the worst recession since the Great Depression, he said.

I would agree with him up to this point. What he then predicts seems rather unlikely to happen.

The muni market is leveraged and opaque, in terms of pension obligations. It is a big market, and problems can "go systemic," he writes. Much of the tax base, things like toll revenue, is already mortgaged. Once a few municipalities default on their debt, "there is a risk of a widespread cascade because the opprobrium will be lessened."

Finally, those investors who seek salvation in geographic diversification may be disappointed, just as those in the housing market were. That's "because similar methods of leveraging were being employed throughout the country."

Bookstaber is a serious, smart fellow, a hedge-fund and Wall Street securities firm veteran. What he says can't be dismissed as the usual headline-grabbing bloggery hysteria.

Los Angeles, Detroit

Bookstaber also works for the SEC. So he may have some special insights (he noted that his blog post is his personal opinion and not the views of the SEC or its staff).

As if to punctuate the man's arguments, the city controller of Los Angeles this week said it might go broke in a month; the mayor called for nonessential services to be shut down for two days a week. The Citizens Research Council of Michigan, an independent research organization, released a report on Detroit, and said it might be helpful if the city reorganized under bankruptcy protection.

There's a lot of bad stuff going on in Muniland right now. Because tax revenue tends to lag behind economic recovery, there's more gloom on the horizon. The question for bond buyers is whether "things can go systemic," as Bookstaber puts it.

I don't think so.

Nor do I think that bond investors are well-served by ignoring the imminent perils their market has to navigate. Perhaps I have received one too many e-mails from readers complaining that I somehow do a disservice to the municipal market by publishing facts about unfunded pension liabilities, rising default rates, and public officials who are looking into the possibility of Chapter 9 bankruptcy.

Default Record

Still, systemic? Really? What would that mean? The $2.8 trillion municipal market is enormous. First there's the number of governmental units, including things such as school districts and authorities: 89,526 at last count, which was in 2007. There are probably more today.

So how would you quantify "systemic" default? If we say only half of the governments sold bonds, that's about 45,000. The figure is probably higher, though, because so many small issuers sell bonds once every few years.

Is systemic, then, 10,000 defaults? Maybe it's 20,000? The record year in recent history for defaults was 1991, when 259 bond issues either failed to make debt-service payments or violated covenants, according to the Distressed Debt Securities newsletter of Miami Lakes, Florida.

During the Great Depression, from 1930 to 1939, 4,770 municipal-bond issues defaulted, according to George H. Hempel's book "The Postwar Quality of State and Local Debt" (1971). More than 60 percent occurred in the South or the Midwest.  (Where there are very few JEWS...The CSR)

Inconsistent Condition

I don't buy the idea of a mass meltdown. The municipal market is too specific and too particular. It resists categorization and generalization.

Not all states and localities are alike, when it comes to their budgets or pension liabilities. Some are on the brink, others are courting disaster, and still others are managing. Tax revenue and investment returns are already coming back.

What will we see instead? It will be bad enough. There will be more defaults, yes, and possibly a few high-profile bankruptcies that will shock the system. The really bad news will probably be concentrated in a number of states, the same way most of the housing collapse was.

The best thing about these "crisis" calls is that they focus states' and municipalities' attention on their pension shortfalls and their intractable public labor unions.

The backlash against ever more lavish public pensions has begun, and it won't be pretty.

(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)

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To contact the writer of this column: Joe Mysak in New York at http://www.bloomberg.com/apps/news?pid= ... j_LXH6zUrw