Thursday, December 17, 2009

Chanos on Munis

"James Chanos, the famed short seller who was among the first to forsee the collapse of Enron, recently sounded the alarm on the municipal bond market--in the hallowed halls of the New York Historical Society, no less. ... In a subsequent telephone interview with this columnist, Chanos said, 'State and local municipal finance are a mess and going to get worse.' ... California faces a $60 billion deficit, and the politicans there believe that in a worst-case scenario, the federal government will bail them out,' says Chanos. ... Ex- [New Jersey] Governor James McGreevy had bonded for current-account expenses before he resigned, and the bonding was stopped by the state's courts. His Democratic successor, former Goldman Sachs honcho Jon Corzine, promised property-tax relief to the middle class but couldn't deliver, and therefore got the boot. Given the scope of the problem, 'munis are a bad bet,' says Chanos", Tom Sullivan at Barron's, 9 November 2009, link:

I agree with Chanos, munis are a disaster waiting to happen. "But many state constitutions require bond holders get paid first". So? If you think a piece of paper will protect you as a muni bond holder from the need to run: local police forces, courts, prisons, etc., you're nuts! See my 5 January 2008 post:

1 comment:

Anonymous said...

From your 1-5-08 post...excellent...

Munis/corporates/treasuries/gilts/oats... it's all the same thing ... just a "promise" to pay...

Home Building & Loan v. Blaisdell, 290 US 398 (1934).

"The act provides that, during the emergency declared to exist, relief may be had through authorized judicial proceedings with respect to foreclosures of mortgages, and execution sales, of real estate; that sales may be postponed and periods of redemption may be extended," 416. "The state court upheld the statute as an emergency measure. Although conceding that the obligations of the mortgage contract were impaired, the court decided that what it thus described as an impairment was, notwithstanding the contract clause of the Federal Constitution, within the police power of the state as that power was called into exercise by the public economic emergency which the Legislature had found to exist", 420. "In Von Hoffman v. City of Qunicy, supra, a statute which restricted the power of taxation which had previously been given to provide for the payment of municipal bonds was set aside", 432. "Not only is the constitutional provision qualified by the measure of control which the state retains over remedial processes, but the state also continues to possess authority to safeguard the vital interests of its people", 434. "The policy of protecting contracts against impairment presupposes the maintenance of a goverment by virtue of which contractual relations are worth while-a government which retains adequate authority to secure the peace and good order of society. ... And all contracts are subject to the right of eminent domain", 435. "The Legislature cannot 'bargain away the public health or public morals'," 436. "The states retain adequate power to protect the public health against the maintenance of nuisances despite insistence upon existing contracts. ... The economic interests of the state may justify the exercise of its continuing and dominant protective power, notwithstanding interference with contracts. ... This power, which, in its various ramifications, is known as the police power, is an exercise of the soverign right of the government to protect the lives, health, morals, comfort, and general welfare of the people, and is paramount to any rights under contracts between individuals", 437.