Tuesday, March 2, 2010

What's Chapter 9?

"Just days after becoming controller of financially strapped Harrisburg, Pa., in January, Daniel Miller began uttering an obscure term that baffled most people who had never heard it and chilled those who had: Chapter 9. ... Created in the wake of the Great Depression, Chapter 9 is widely considered a last resort and filings under it are more taboo than other parts of bankruptcy code because of the resulting uncertainty for everyone from municipal employees to bondholders. ... As their revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds, And that is causing worry about the safety of securities traditionally considered low risk. ... For example, it isn't safe to assume that governments can raise taxes to cover shortfalls. ... Harrisburg Mayor Linda Thompson, a Democrat elected in November, opposes a bankruptcy filing and has presented an emergency plan that includes selling some of the city's assets. ... Since Chapter 9 was enacted in 1934, just 600 cases have been filed under the cose, partly because they require state approval. Some municipalities have found escape hatches, such as raising taxes. ... But many experts fear that a surge in municipal filings is unavoidable", Ianthe Dugan & Kris Maher at the WSJ, 18 February 2010, link:

Do you still want to own muni bonds?


Anonymous said...

Point taken.

It is a little difficult to imagine all states and local govs defaulting.

But some will.

Like California, Michigan and New Jersey.

Anonymous said...

news on that front from Daily Reckoning It would seem to me that as defaults take place and prices bid lower on muni's going forward yields should then rise. At the moment, I'm seeing nothing but a Mexican Standoff on the rate paid to my money market muni bond account. It has been treading water with a very low rate of return for almost a year now.