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The Muni Meltdown that Wasn’t

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Municipal bonds, or munis, don’t get anywhere near as much press as sovereign bonds let alone equities, but when the financial crisis was still fresh in everyone’s mind and the opinions of credit agencies were still pretty thoroughly tarnished there was a brief period when you could have been forgiven for thinking that the sky was falling.

“In 2010, municipal bonds, hitherto known only as secure, boring investments, if sometimes a little weird, were front-page news. It was stated with some confidence that the entire market was going to go bust,” writes Joe Mysak in his Bloomberg Briefs special report “The Muni Meltdown that Wasn’t”.

Of course the meltdown never came, and as Mysak explains, it was really only the ‘tourists in Muniland’ who thought that it would.

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From Dark Visions to 60 Minutes

Mysak dates the Muni hysteria back to Frederick Sheehan’s 2009 article, “Dark Vision: The Coming Collapse of the Municipal Bond Market,” which was just as bearish as the title implies. Mysak, who is been covering the muni bond market for decades, initially dismissed the article but watched as it circulated across the web and continued to gain traction. The best part of Mysak’s article is the amount you can learn about the muni bond market in what is also an interesting story about media and narrative, but probably the second best is that he’s perfectly happy to call out journalists and analysts by name for the position they took during the two to three-year hysteria.

That’s not to say that none of the issues the people raised were legitimate. It was true that many public pension plans were underfunded and the public officials didn’t always think through the financial implications of their campaign promises. Though reaching the conclusion that there would be widespread in this for defaults was hard to justify, and many of the muni bears’ arguments were based on their own misconceptions, not just negative forecasts.

The beginning of the end was when Meredith Whitney went on 60 Minutes in December 2010 to talk about municipal bonds and close the segment by saying there would be “Fifty to 100 sizeable defaults. This will amount to hundreds of billions of dollars’ worth of defaults.”

Citing specific, and wildly unrealistic, forecasts gave financial analysts something solid to push back against. Instead of simply trying to wave away innuendo, they could show how unrealistic it was that they could be so many defaults around the corner.

Mysak’s takeaway from the muni bond hysteria

Mysak gives an incredibly detailed account of the media hysteria, and if you’re interested in the muni bond market you should take the time to read the whole thing. There are a couple of general reasons to be skeptical the municipal bonds whatever go into default en masse. They are “particular and specific” with something like 50,000 distinct entities having borrowed through the muni bond market with different covenants, income streams, tax liabilities, etc. Anyone making broad generalization about this particular market does so at their own peril. Also, coupon payments aren’t as large as people seem to think, and the cost of default usually eclipses them, so municipalities really will go to some lengths to avoid default.

But Mysak trust to other conclusions from the whole mess that seem worth bearing in mind even if you never intend to invest in munis. The first is that the naysayers often had a track record of predicting major problems in other industries or other asset classes, and then used that expertise to justify their arguments about munis. The second is that politics and credit analysis don’t mix. In the case of the muni bond hysteria, Mysak says there was a lot of anti-union sentiment masquerading as appeals for more responsible budgeting, which sounds similar to other major political fights in the last few years.

And while he talks about himself as part of the old guard throughout the piece, Mysak’s final warning is “Twitter is a good source of breaking news and analysis. Dismiss it at your risk.”


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