Sunday, June 22, 2008

Look Out Below!

On December 29, 2007, Bill said this:

Moody recently downgraded MBIA from AAA+ to AAA+ (negative outlook). Critics argue that Moody is being easy on them in an effort to not be blamed if things fall apart. The same crooks who packaged the mortgage bundles are the same crooks who perform ‘due diligence’ on municipal bonds.

Municipal bonds are headed for a fall.

At the time MBIA stock was trading at around $30/share.

Today Bloomberg says this:

June 21 (Bloomberg) -- MBIA Inc.'s five-level downgrade by Moody's Investors Service probably will force it to make $7.4 billion of payments and collateral postings.

MBIA stock is currently selling at $5.59/share and is still overpriced. Later this year we will begin to see a wave of municipal bankruptcies. Bondholders will push their municipalities to file for bankruptcy sooner than later so that they have a chance to collect some insurance money from bond insurers before the insurers become insolvent.


George said...

Couldn't this muni bond debacle be a "cascading" event? As more muni governments declare bankruptcy, those investors holding their bonded indebtedness will, through their investment houses, ask for more security on their investments. The only security that would be acceptable is a faster bond retirement schedule, but that takes lots more cash than the governments have available.

If accelerated repayment of muni bonds becomes the rule, wouldn't that also accelerate bankruptcies?

The other thing that occurs to me is who holds muni bonds. Rich people who need the tax shelters hold munis. Rich people are usually those who can make a phone call or two and set solutions in motion, which brings us back to accelerated paydown schedules, and accelerated bankruptcies.

If municipal bonded indebtedness overall reaches the status of junk bonds, then no more infrastructure will ever be built by municipal corporations.

We are in our death-spiral as an advanced society.

Bill said...

I agree that our whole financial world is a house of cards at the moment George. The number that I’m trying to wrap my mind around is the fact that someone has lent the banking system $170 trillion. I think that there has already been a run on the banks by whoever is pulling the strings. I’m trying to figure out what one would do with $170 trillion though. How could you shelter that sum of money? You couldn’t buy commodities without violently altering the markets. I can’t figure it out.

But real value isn’t a number at the Federal Reserve. Real value is in our farmland, mines, factories, and skilled workers. In a weird way, I’m kind of hopeful for the future. There’s a whole lot of crap in 2008 other than farms, mines, factories, and skilled workers that I don’t think I’ll miss.