The Securities Industry and Financial Markets Association (SIFMA) held a conference on June 8 to address a number of important issues facing the municipal bond industry. SIFMA’s President and CEO Timothy Ryan made opening remarks regarding the challenges facing municipal bond issuers and was followed by a number of other speakers.
I was not at the conference but the SIFMA web site has made a number of resources available online. In light of recent events, my view is that there are significant risks associated with municipal bonds that now face investors and insurers. These risks include, but are not limited to the following:
- Warren Buffett’s latest annual letter to Berkshire Hathaway shareholders contained a warning regarding potential risks to municipal bond insurers which was the subject of an article on this website in March. In a nutshell, Mr. Buffett warns that the presence of insurance on a municipal bond issue may itself influence the probability of default since the political actors involved may more readily take actions that impact an insurance company rather than municipal bondholders who tend to be wealthier residents and powerful constituents of local and state politicians.
- Congressman Barney Frank and others have proposed that the Federal Government provide an FDIC-like insurance scheme for issuers of municipal bonds which would likely displace private bond insurance underwriters. Rep. Frank has been quoted as saying that this would cost the Federal Government “zero” and was the subject of an article on this website in April. The presence of a Federal Government bailout for municipal bond issuers will only increase the moral hazard that is already prevalent today.
- With state and local governments facing unprecedented financial turmoil, the prospect of defaults has risen substantially. I wrote an article about the New Jersey pension crisis in May with more details regarding why pensions could cause default, and more importantly, why the presence of municipal bond insurance could change incentives in such a way that defaults become more likely in the future. The concept of “shared sacrifice” is gaining momentum throughout the country, as we can see from the treatment of the bondholders in the auto bankruptcies. It is not farfetched to think that municipal bondholders along with insurers of municipal bond debt will be asked to “contribute” to “solutions” in the future.
The SIFMA Conference website provides a number of videos from the event. However, it appears that only Mr. Ryan’s opening remarks are available to non-members of the association.