I heard an economics editor give an amusing response the other day when asked if the U.S. has “free” markets. She responded that, since all markets are regulated, that, pretty much, yes. I had to chuckle because municipal bond markets, although regulated reasonably-well on the primary side when bonds are issued, have minimal supervision or regulation on the secondary or trading side after bonds have been issued. It’s difficult to have confidence that investors are always protected when you read stories about abuses like excessive mark-ups, for example.
Since Kevyn Orr was appointed Detroit’s emergency manager on March 18, his approach always seemed a little off, especially when bankruptcy is concerned. For a Chapter 9 municipal bankruptcy to work, most of the parties must come to a mutual agreement about what each will sacrifice. Federal bankruptcy judges only have the authority to “cram down” a minority of creditors in a specific class when the majority agrees. Federal bankruptcy judge Steven Rhodes, for example, can’t force all bondholders in a class to take a 50 percent haircut. Absent that power, municipal bankruptcy usually lasts much longer than others, as parties come to an agreement.
President Obama’s speech on the economy on Wednesday will be closely watched. My own view is that the president has been consumed with military and surveillance efforts and has lost sight of his role as the nation’s economic leader. His efforts to recharge the economy thus far seem like a re-branding effort. But we need bigger ideas. I hope he has some, a clear schedule and lots of initiative. Charging up the world’s largest economy is no easy task. Reuters’ Mark Felsenthal and Roberta Rampton tell the story:
Joshua Pugh, a writer and contributor to the Detroit News Politics Blog, has written about a topic that is a big one among muniland professionals. That is the question of whether Detroit’s Emergency Manager Kevyn Orr inflated pension liabilities to make the city’s debt appear larger, allowing for more aggressive haircuts for bondholders and pension holders. Pugh points out a Bloomberg Businessweek piece on his personal website:
When I started the Muniland blog in April, 2011, municipal bonds were being affected by a low interest rate environment, making them expensive and offering low yields to investors. Since non-institutional investors usually have to pay big mark-ups to buy them, it didn’t make sense to encourage people to own individual bonds. But the interest rate environment in the next year will be changing, and folks might want to consider good quality municipal bonds as long-term investments. It may start to make more sense that I talk about trading commentaries by muniland professionals.
The emergency manager of Detroit, Kevyn Orr, with the blessing of the Governor of Michigan Rick Snyder, has gone to the federal courthouse and filed a petition for Chapter 9 municipal bankruptcy. The most important dimension of this filing is that it shields the city from lawsuits that are being filed against it. Already Detroit’s public pension funds and workers have filed state-level lawsuits against Orr and Snyder to halt them from filing for bankruptcy. Undoubtedly a legal judgment was made about the validity of those suits and whether seeking the protection of the federal bankruptcy court was necessary.
In the latest sign of Puerto Rico’s perilous financial footing, The Bond Buyer reported that the president of the Government Development Bank of Puerto Rico, Javier Ferrer, announced his resignation on Wednesday.
It’s mind-boggling how much of the national economy is held up by state and local governments. From the Federal Reserve Bank of Atlanta: