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September 29, 2011

Muniball: Michael Lewis Takes a Swing At Municipal Bonds

By Mark Bergen

Of course he went to California. After documenting the aftermaths in Ireland and Greece, then turning feebly to Germany, Michael Lewis, the “esteemed vagabond financial scribe,” as John McDermott calls him, toured the Golden State. And in the process, he managed to rehash the controversial role of Meredith Whitney in the municipal bond market so central to U.S. cities.

I always enjoy Lewis’ prose. Coupled with Tad Friend’s New Yorker piece on Costa Mesa, we have an elegant, yet elaborate, picture of local governments weighed down by financial mismanagement and existential greed. Friend is a bit more nuanced, while Lewis tends to skip over key figures in exchange for hyperbole—i.e. comparing municipal public service benefits to a Madoff scheme.

McDermott has more on how Lewis treats Whitney’s famed, now terrifically inaccurate, prediction. Two days after the year anniversary of Whitney’s proclamation, Cate Long reviews the impact of the analyst’s “reckless actions”:

“Whitney’s call for muni apocalpyse scared many retail investors who promptly sold their muni bond funds and fled out the exit door. This mutual-fund selling caused fund-management groups to quickly sell bonds out of their portfolios. Unfortunately there were few buyers waiting to absorb these sales. Whitney’s call created a velocity of supply that hadn’t been seen in muni markets since the general market panic of 2008. Buyers stepped in eventually of course, but it was primarily high net worth individuals and hedge funds who had years of experience with the asset class and believed that the bonds continued to be rock-solid.”

That last line supports what some are labeling an unintended consequence of the Obama jobs bill: the new taxes on high earners will push some of these buyers out of the municipal bond market, lifting borrowing costs for cities. (Even if this happens, I’m skeptical that it would outweigh the benefits of the new stimulus, particularly if measures went to household deleveraging—pulling underwater urbanites out of debt.)

As a new report from MunilC (again, via Long) shows, bond issuing this year has continued to roll onward:

And Gov. Rick Perry, as I’ve noted before, keeps relying on the stability of the market.

In the report, Joseph S. Fichera, the CEO of the advisory firm Saber Partners, LLC, advocates for a uniform municipal bond central exchange, a solution that the researcher Andrew Ang has also pushed. The proposal is an adamant call for consistency in the market, at a time when some of its closest watchers see a rug being pulled from underneath.

© 2011, Forbes, September 29, 2011


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