Hmmm. I think the old codger may be making a smart move here.-Lou
Buffett’s Exit From Muni-Bonds Signals Trouble Ahead for Local Govts
Warren Buffett’s Berkshire Hathaway ended its five-year bullish bet on the municipal bond market, disclosing in a recent quarterly filing that the Ohama, Neb., company canceled $8.25 billion worth of credit-default swaps that insured its muni-bond market wager, The Wall Street Journal reports. The Journal said it was unclear whether Buffett’s decision resulted in a profit or a loss and the 81-year-old Buffett declined to comment about the early termination of the contracts.
Does Warren Buffett’s exit from the municipal bond market portend more financial hardships for struggling U.S. states and cities?
Buffett’s move may very well signal his fear that more cash-strapped cities, states and municipalities will default on their debt, as The Daily Ticker’s Aaron Task and Henry Blodget discuss in the accompanying video. Local authorities have been making severe budget cuts (affecting both personnel and services) over the past two years to stave off bankruptcy but many are still short on funds.
Investors though have taken a positive outlook on the $3.7 trillion municipal market, pouring $964 million into municipal-bond mutual funds last week — the 18 the straight week of inflows. Investor appetite may be stronger for municipal debt than U.S. government bonds, but the tide could be changing after the Berkshire Hathaway disclosure.
There have been six Chapter 9 municipal bankruptcy filings this year compared to 13 in 2011. Muni bankruptcies have totaled 268 since 1980, according to Reuters, with cities, villages and counties accounting for 49 of the filings.
Nebraska, California and Texas have the highest number of bankruptcy filings. Stockton, Calif., became the largest U.S. city to ever declare bankruptcy when city officials were unable to reach a deal with creditors and San Bernardino, Calif., filed its bankruptcy paperwork on Aug. 1, making it the third California city, after Mammoth Lakes, to seek bankruptcy protection.
Scranton, Pa., could be the next big city to go belly-up — its city business manager Ryan McGowan told the Scranton Times-Tribune that Scranton has just $133,000 in cash but owes vendors $3.4 million. The formal industrial city also decided to slash public employee’s hourly pay to $7.25 — firefighters, police officers and the mayor included — to stop hemorrhaging money. Public employees are not only experiencing job cuts and smaller wages — local authorities are under pressure to reduce their employee’s benefits and pensions too.