07 October 2013

More Boo-Hooing About Municipal Bonds

A repost from The Faculty Lounge:

I've previously noted that the so-called "gold standard" of general obligation municipal bonds was always a chimera. Cities paid bondholders at the expense of citizens, employees, and retirees not because the law required it but because they were afraid not to. And I argued here that not to cut payouts to bondholders in bankruptcy (at least without the consent of everyone else) violates the Bankruptcy Code.

Now comes along Chicago Fed Bank researches who are shocked, SHOCKED that such may be the case. If you have access to Reuters you can read about it here. They purport to be concerned that not paying general obligation bonds may raise the cost of borrowing to cities whose pension debts are woefully underfunded. Duh. One wonders why bond underwriters and ratings agencies have been collecting hundreds of millions in fees if not to evaluate the creditworthiness of municipalities. Shame on them, not a city's other creditors, if they haven't been doing their jobs.

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