Warren Buffett: Muni Bankruptcies Poised to Climb as Stigma Lifts
Friday, 13 Jul 2012 12:16 PM
Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said municipal bankruptcies are set to rise as there’s less stigma attached after three California cities opted to seek protection just weeks apart.
The City Council of San Bernardino, California, a community of about 210,000 east of Los Angeles, decided July 10 to seek court protection from its creditors. The move came just weeks after Stockton, a community of 292,000 east of San Francisco, became the biggest U.S. city to enter bankruptcy. Mammoth Lakes, California, also sought the shelter this month.
“The stigma has probably been reduced when you get very sizeable cities like Stockton or San Bernardino to do it,” Buffett, 81, said in an interview on “In the Loop with Betty Liu” on Bloomberg Television. “The very fact they do it makes it more likely.”
Cities and towns across the U.S. have been strained by rising costs for labor, including pensions and retiree health benefits, while the longest recession since the 1930s crimped sales- and property-tax revenue.
“Once people find that the city works the next day, it makes it easier for the city council next time they have a problem with pensions — or whatever it is — just to say, ‘well, we’ll declare bankruptcy,’” said Buffett, whose company is based in Omaha, Nebraska.
He said the nation isn’t on the brink of hundreds of billions of dollars in defaults, as banking analyst Meredith Whitney predicted in 2010.
“I don’t think we’re at the precipice,” Buffett said. “People will use the threat of
bankruptcy to try and negotiate, particularly pension contracts, with their employees.”
Berkshire held municipal bonds valued at about $3 billion as of March 31, or about 9 percent of the fixed-maturity portfolio, according to a regulatory filing.
That’s down from about $3.6 billion at the end of 2010. The company also had as much as $16 billion at risk in derivatives tied to such debt at the end of the first quarter, the filing shows.
The billionaire predicted a “terrible problem” for municipal bonds in coming years in testimony to the U.S. Financial Crisis Inquiry Commission in June 2010.
Forty-two municipal issuers have defaulted for the first time in 2012, down from 68 in the same period last year and 83 in 2010, according to Municipal Market Advisors.
“It’s too early to say that there’s a lack of stigma,” John Hallacy, head of municipal research at Bank of America Merrill Lynch in New York, said in a phone interview. “Municipal bankruptcy is a gut-wrenching process. There’s nothing easy about it.”
Tax-exempt mutual funds have continued to attract investors, who added about $653 million to U.S. municipal bond funds in the week through July 11, the most since mid-May, Lipper US Fund Flows data show.
Yields on 10-year benchmark munis fell to 1.77 percent as of noon in New York, the lowest since May 15, according to Bloomberg Valuation data.
While the U.S. Local Gov’t system is somewhat different, the “canary in the mine” message still resonates.
Gov’ts collectively, have overspent, and it is apparently catching up with Local Gov’ts. Local Gov’ts are not allowed to run deficits, per se, but that does not mean they may set up ” bad gambles ” in motion which ultimately create such scenarios.
Here in BC, in Metro Vancouver, it is certain the Real Estate party is over. All classes of BC Real Estate are dropping in price and sales.
However, one class that I submit is going to be a DISASTER is the multi family residential and particularly the Hi Rise class. However, the idiots at City Hall are still pumping out permits, particularly around the Richmond Oval. This makes no sense..or does it?
These may be pre-sale obligations being fulfilled, or more money – laundering. Regardless, once the City stamps APPROVED, it gets its Development Cost Charges(DCCs) before the first cement is poured. The more of these they can approve, the more $$$ enter the City coffers.
However, as I have stated previously this is a major disconnect with the City(aka The Taxpayer funded Hired Help ) plans and the past equity built up by individual property owners. The City can always manipulate the annual tax grab, but it is the individual owners who could see their own equity diluted by this irrational binge.
My gut feel is that the City is over – extended, is desperate for revenue, and we will see judgement day soon.There is absolutely no evidence that what is going on in the US cannot happen here…..and morseo, given the US was our canary in the mine REAL LIFE example.
I realize that a Local Gov’t is not ” the cop for the economy”, but this is beyond ridiculous….and many Richmond residents will inevitably suffer the consequences.