Do you own Detroit municipal bonds?

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Beagler
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Do you own Detroit municipal bonds?

Post by Beagler » Sat Jun 22, 2013 3:34 pm

“It definitely sets a precedent, and there’s definitely going to be a penalty going forward for the city and the state,” said Dan Solender, director of munis at Lord Abbett & Co. in Jersey City, New Jersey. The company oversees $19.5 billion of local debt.

http://www.bloomberg.com/news/2013-06-1 ... nings.html

Is anyone a bit more jittery about holding muni's?
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Rainier
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Re: Do you own Detroit municipal bonds?

Post by Rainier » Sat Jun 22, 2013 3:43 pm

Read the part about them being insured?

Also, notice they have to raise taxes to pay the bonds? They can stop temporarily but the courts will come in and force them to pay. The insurers will have a vested interest in this as well.

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baw703916
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Re: Do you own Detroit municipal bonds?

Post by baw703916 » Sat Jun 22, 2013 3:52 pm

First, let's look at what Detroit's credit rating is:
Standard & Poor’s lowered its rating on the city’s general-obligation debt a step to CC from CCC- with a negative outlook. That’s 10 steps below investment grade.


OK, so CCC- before the latest downgrade.

Now, given that all the national muni funds I own are from Vanguard, let's see how the credit rating of their riskiest muni fund (VWAHX) breaks down:

AAA 6.6%
AA 26.4%
A 45.7%
BBB 12.3%
BB 1.9%
B or Lower 2.9%
NR 4.2%


And if you had bought a non-high yield fund (VWITX) instead:

AAA 16.3%
AA 50.1%
A 29.4%
BBB 2.8%
BB 0.1%
B or Lower 0.7%
NR 0.6%


In other words, no Vanguard fund has a significant holding of any bonds even a couple steps less risky than Detroit's were rated even before the latest downgrade.

So, no I'm not worried.
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madbrain
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Re: Do you own Detroit municipal bonds?

Post by madbrain » Sat Jun 22, 2013 3:59 pm

Rainier wrote:Read the part about them being insured?

Also, notice they have to raise taxes to pay the bonds? They can stop temporarily but the courts will come in and force them to pay. The insurers will have a vested interest in this as well.
I'm surprised they are still insured. Many muni bond insurers went bust during the financial crisis. Not because of muni defaults, but because of the fake AAA bonds.

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Rainier
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Re: Do you own Detroit municipal bonds?

Post by Rainier » Sat Jun 22, 2013 4:07 pm

They buy the insurance at the issuance. It doesn't go away.

Which insurers went bust? Most didn't, they just stopped issuing new policies. The beauty of muni insurance is that the insurance rarely has to pay because they are legally obligated to raise taxes.

madbrain
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Re: Do you own Detroit municipal bonds?

Post by madbrain » Sat Jun 22, 2013 4:36 pm

Rainier wrote:They buy the insurance at the issuance. It doesn't go away.

Which insurers went bust? Most didn't, they just stopped issuing new policies. The beauty of muni insurance is that the insurance rarely has to pay because they are legally obligated to raise taxes.
AMBAC did, mostly due to MBS/CDOs.

Looks like MBIA is on the verge of doing so for the second time, but they spun off their muni insurance unit.

Wikipedia has a good page.
https://en.wikipedia.org/wiki/Bond_insurance

I guess I was wrong, it is not that many that went backrupt. But I think AMBAC was a major player. A lot of muni bonds were insured by them and my understanding is that they lost their insurance coverage as a result of the bankruptcy.

Valuethinker
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Re: Do you own Detroit municipal bonds?

Post by Valuethinker » Sat Jun 22, 2013 4:37 pm

madbrain wrote:
Rainier wrote:Read the part about them being insured?

Also, notice they have to raise taxes to pay the bonds? They can stop temporarily but the courts will come in and force them to pay. The insurers will have a vested interest in this as well.
I'm surprised they are still insured. Many muni bond insurers went bust during the financial crisis. Not because of muni defaults, but because of the fake AAA bonds.
I imagine you can still find Bill Pershing's powerpoints somewhere on the web?

MBIA and AMBAC had to be refinanced because of failures of CDO tranche insurance they had issued.

I don't know what happened to the muni bonds that they insured.

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Rainier
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Re: Do you own Detroit municipal bonds?

Post by Rainier » Sat Jun 22, 2013 4:59 pm

I think it's Bill Ackman and I have seen the presentation. I generally find him to be very obnoxious and he will likely be sued by the sec...some day. Regarding the muni insurers though, he was correct.

Yes, most of them were recapitalized. I don't think anybody lost insurance coverage. But many munis were rated aaa because their insurance was rated aaa. After the insurers lost their ratings so did the underlying bonds.

It wasn't the munis that brought down the insurers. It was other debt they started to insure. Like sub prime mortgages.

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abuss368
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Re: Do you own Detroit municipal bonds?

Post by abuss368 » Sat Jun 22, 2013 6:53 pm

I prefer the beauty and simplicity of the Intermediate Term Tax Exempt Bond fund.

Low cost, simple, effective, excellent diversification.

Thank you Vanguard and Jack Bogle!
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

rokidtoo
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Re: Do you own Detroit municipal bonds?

Post by rokidtoo » Sat Jun 22, 2013 9:02 pm

Rainier wrote:Read the part about them being insured?

Also, notice they have to raise taxes to pay the bonds? They can stop temporarily but the courts will come in and force them to pay. The insurers will have a vested interest in this as well.
As of last November, homes were still selling for $1 in Detroit. People are torching their real estate in Detroit, Hamtramck, and Highland Park to get the insurance money. How will the courts force them to pay?

http://www.businessinsider.com/detroit- ... 012-2?op=1

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Rainier
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Re: Do you own Detroit municipal bonds?

Post by Rainier » Sun Jun 23, 2013 4:23 am

rokidtoo wrote:
Rainier wrote:Read the part about them being insured?

Also, notice they have to raise taxes to pay the bonds? They can stop temporarily but the courts will come in and force them to pay. The insurers will have a vested interest in this as well.
As of last November, homes were still selling for $1 in Detroit. People are torching their real estate in Detroit, Hamtramck, and Highland Park to get the insurance money. How will the courts force them to pay?

http://www.businessinsider.com/detroit- ... 012-2?op=1
That's why they are courts, they don't care about the headlines. Some of these munis are secured debt with a legal obligation to raise taxes to pay principal and interest. Not sure how it works in this case. Eventually they get paid. If they go through bankruptcy maybe they are forced to sell other assets, but the muni debts are on the top of the list for repayment.

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