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: http://online.barrons.com/article/SB125755357455934925.html.
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: http://skepticaltexascpa.blogspot.com/2008/01/municipal-bonds-at-risk.html.