Muni sweeps: How does $775 billion of bonds go missing?

June 7, 2011

How does $775 billion of bonds go missing?

There is a sleeper story in muniland about a big pile of just-discovered municipal bonds. The story has some odd twists and turns. John McDermott of FT Alphaville scooped the details yesterday:

FT Alphaville typically estimates the size of the muni market at $2,900bn, based on year-end 2010 data from the Federal Reserve. The FT uses the same figure, occasionally rounding up to $3,000bn.

But the Fed is underestimating the size of the market by nearly $800bn, according to analysis by Citigroup’s municipal bond team.

You can’t “undercount” $775 billion of municipal bonds unless your data systems are seriously messed up. And whose system is seriously messed up? According to Citigroup’s George Friedlander, it’s the Federal Reserve. After a recent meeting and discussion with the Fed, Mr. Friedlander has announced a substantial jump in the size of muniland.  FT Alphaville has this excerpt from Friedlander’s report:

After considerable conversation with Federal Reserve staff and recalculation based upon separate sources, we have concluded that the Fed’s data dramatically understates the amount of outstanding municipals. We now estimate that there is a sum total of roughly $3.7 trillion in state and local debt outstanding, in comparison with the $2.925 trillion reported by the Fed for year-end 2010. While the Fed may modify its data at some point, we felt that it was important to present this modified picture of the size and mix of holdings on a timely basis.

Does the Fed usually announce such enormous changes in data this way? The $2.9 trillion number for the size of muniland is also the same figure used by the Securities Industry Financial Markets Association (SIFMA), the trade group for the securities and bond markets. The Bond Buyer pointed to the sourcing of data for the Fed’s error:

The understatement, Friedlander said, is caused by the Fed having no single source for calculating the household sector — which owns 38% of outstanding muni debt.

This is an especially odd statement since the Federal Reserve conducts the Survey of Consumer Finance every three years and allegedly gets source-level data. Something is not passing the smell test in muniland.

Interestingly, Rockfleet, a small broker dealer in New York, published a report in April that used Bloomberg data to estimate the size of the municipal bond market at slightly over $4 trillion. This is much closer to the “revised” figure from the Federal Reserve. Given this huge revision should we be suspicious of all the data coming from the Fed?

Meredith rides back on the scene

Meredith Whitney has taken center stage in muniland again with a new report from her research firm and an exclusive interview with Fortune magazine. Numerous municipal-bond professionals have pointed out that Ms. Whitney is oddly selective in whom she grants  interviews to. First it was the generalist TV program “60 Minutes,” then she was on a panel at an investment conference where the questioner was from Noticeably absent from the list is the Bond Buyer, Reuters and Bloomberg. All these publications have deep teams of knowledgeable journalists who cover muniland. Bloomberg specifically said that she would not return their calls.

The crux of Ms. Whitney’s arguments relates to the level of defaults that we will see in muniland. The numbers are big and a little fuzzy so it is easy to have disagreements. But many in muniland are beginning to wonder if Ms. Whitney has some agenda other than just challenging conventional wisdom. I’ll write a more complete post addressing her recent “analysis.”

“The people cherish the system”

From Streetfilms via Shareable Cities:

The 50,000-bike system in this southern China city of almost 7 million people (about 1.5 million people fewer than New York City) blows all other bike-shares off the map.

Hangzhou’s 2,050 bike-share stations are spaced less than a thousand feet from each other in the city center, and on an average day riders make 240,000 trips using the system. Its popularity and success have set a new standard for bike-sharing in Asia. And the city is far from finished. The Hangzhou Bicycle Company plans to expand the bike-share system to 175,000 bikes by 2020!

Mini sweeps

Standard & Poor’s: Video: How Declining U.S. States’ Pension Funding Could Affect Credit Quality

Ipreo: Muni Deal Calendar (w/o June 6, 2011)

Dow Jones: Slow Start To The Week For New Debt Issuance

Bond Buyer: Market Close: Tax-Exempts Steady in Quiet Monday

Investment News: BondView to run the rule over muni bond funds

New York Times: A Disabled Boy’s Death, and a System in Disarray

Marketplace Radio: California prison costs prompt reform

Philadelphia Inquirer: Updated: Layoff notices on hold for now, judge rules

San Diego Union Tribune: Pension givebacks for some are hefty


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“Numerous municipal-bond professionals have pointed out that Ms. Whitney is oddly selective in whom she grants interviews to.” I believe its grammatically incorrect to end a sentence with a preposition. “in whom she grants interview” is accurate.

Posted by taylorR | Report as abusive

Thanks Taylor — I’ll mention it to my otherwise excellent editor.

Posted by Cate_Long | Report as abusive

Cate, I wouldn’t bother your editor with this misguided correction (“I believe it’s grammatically incorrect,” to correct the comment). That rule was devised by grammarians who wanted English to behave more like Latin. Search on “preposition end sentence” for more on the subject.

Posted by A.deWitt | Report as abusive

[…] size of the municipal bond market, which the Federal Reserve estimated was $2.925 trillion. Daniel used a series of privately maintained databases to establish that the true size of the municipal bond market is closer to $3.7 trillion. The Fed concurred with […]

Posted by The Fed’s data snafus | MuniLand | Report as abusive

[…] in the municipal bond market have been discussing the Fed’s bad numbers for months. Daniel Berger of Thomson Reuters wrote back in June about the possible reasons why the […]

Posted by Found: $840 billion in municipal bonds | MuniLand | Report as abusive