Saturday, April 18, 2009
Barney Frank goes for two
Rep. Barney Frank (D-MA), as a follow up to his prescient analysis that Fannie and Freddie were in fine financial shape and needed no further oversight in 2003 (contrary to concerns expressed by regulators and other House members), wants to "create what he calls an FDIC-like federal insurance program for municipal bonds," according to an editorial in Friday's Wall Street Journal. Rep. Frank believes that the cost of borrowing is too high for municipalities and counties, and that the notion of Washington backstopping the default risk would lower costs with no risk to the taxpayer.
Well, since insuring munis is a business that Warren Buffett (p.14 of the pdf file) is extremely cautious about, then of course Rep. Frank must have a winning idea on his hands:
"Local governments are going to face far tougher fiscal problems in the future than they have to date. The pension liabilities I talked about in last year’s report will be a huge contributor to these woes. Many cities and states were surely horrified when they inspected the status of their funding at yearend 2008. The gap between assets and a realistic actuarial valuation of present liabilities is simply staggering.Even if a single digit percentage of the total outstanding amount of municipal bonds defaulted, this would put taxpayers on the hook for north of $100 billion, under Rep. Frank's proposal. Is he trying to breed the next round of chickens to come home to roost?
"When faced with large revenue shortfalls, communities that have all of their bonds insured will be more prone to develop “solutions” less favorable to bondholders than those communities that have uninsured bonds held by local banks and residents. Losses in the tax-exempt arena, when they come, are also likely to be highly correlated among issuers. If a few communities stiff their creditors and get away with it, the chance that others will follow in their footsteps will grow. What mayor or city council is going to choose pain to local citizens in the form of major tax increases over pain to a far-away bond insurer?
"Insuring tax-exempts, therefore, has the look today of a dangerous business – one with similarities, in fact, to the insuring of natural catastrophes. In both cases, a string of loss-free years can be followed by a devastating experience that more than wipes out all earlier profits. We will try, therefore, to proceed carefully in this business, eschewing many classes of bonds that other monolines regularly embrace."
1 Comments:
By 
John, at
Sat Apr 18, 01:33:00 PM:
"...the next round of chickens..."
Nice.
While it seems harmless, I can't help but see it as part of a series of steps in federal assumption of local governments. The states are practically irrelevant already, next even the smallest towns will be subject to absolute reliance on the feds. Soon a town won't be able to fix a light bulb without complying to federal hate crimes standards.
