For now, the fear of destabilizing the municipal bond market with the words “state bankruptcy” has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possibility in a hearing this month.
House Republicans, and Senators from both parties, have taken an interest in the issue, with nudging from bankruptcy lawyers and a former House speaker, Newt Gingrich, who could be a Republican presidential candidate. It would be difficult to get a bill through Congress, not only because of the constitutional questions and the complexities of bankruptcy law, but also because of fears that even talk of such a law could make the states’ problems worse.
Um are these guys crazy? Class 1 State Municipal Bonds generally have a .24% chance of defaulting. That is why you accept a lower interest rate to own these things. Now we have Gingrich of all people advocating that states go bankrupt in order to get out of their pension obligations? Or maybe he is thinking this is just a sneaky way to stick it to public workers unions.
In any case does he know there are $1.8 trillion worth of these things floating around out there? Plus like 60% or more are owned by individuals and mutual funds that sell to individuals. That is Main Street Newt. Plus many insurance companies are forced to hold a certain amount of them as part of doing business.
If these people aren't made whole and have to accept 60 cents on the dollar or something then who knows what will happen next? One big state bankruptcy like Illinois or California could cause millions of people to possibly lose their interest payment for a while or worse-comes-to-worse a big chunk of their principal. That could mean billions of dollars in pain and turmoil in a market that is usually rock solid to just bail out States that spent like drunken sailors.
What it will mean is that Muni prices will tank across the board as a brand new thing called "state bankruptcy risk" will get factored into the equation. I for one will not invest in something that could be damaged by the mere fact that some public employee union got a gold-plated pension that the state can no longer pay for. Why should I shoulder the risk so that some legislature can give themselves a 36% pay raise?
I would much rather take my "staid and true" money and invest it in a huge corporation that actually has people watching the till. That company not only balances their budget but generates billions in profits as well.
If the choice is between a Legislature in Sacramento or Springfield , Ill who thinks taxpayers money is Monopoly money and Exxon Mobil Corporate Bonds you know who I would pick going forward. If Newt and his friends actually gets this thing to pass through Congress I can't wait to pull the lever for any GOPer besides him.
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