Thread: U.S. States / Cities Going Bust, Day of Reckoning at Hand

U.S. States and Cities Going Bust, Day of Reckoning Is at Hand!

Interest-Rates / US Debt
Dec 27, 2010 - 09:07 AM
By: Martin_D_Weiss

At this very moment, cities and states all across this country are facing their day of reckoning, with far-reaching consequences for the economy, investors and every American citizen.

This morning, I will show why this day is so urgent, how to protect yourself and even how to profit from the crisis. But first …

Some Dire Warnings from the Past

Back in the 1930s, when my father and his brothers were beginning their career on Wall Street, the finances of thousands of cities and dozens of states were in shambles.

More than $5.5 billion or 30% of their bonds defaulted.

Nearly all slashed or even shut down schools, libraries — even police and fire stations.

Dad’s colleagues on Wall Street had said it could never happen. But it did.

Four decades later, when I was in Brazil in 1970, I saw a similar phenomenon.

City budgets were gutted.

Public buildings were sold off to the highest bidder.

Public employees and other creditors waiting for up to six months to get paid.

Today those same cities in Brazil are in much better shape. But, unfortunately, we cannot say the same for our cities and states in the United States.

Indeed, more recently, when I predicted that rich states like California and New York — plus thousands of cities of all sizes around the country — would suffer a similar crisis …

Moody’s, S&P and Fitch Scoffed and Growled

Moody’s, S&P and Fitch are paid huge fees by thousands of state and local governments for giving them ratings that are typically overinflated.

They’re paid additional fees for rating the insurance companies that supposedly guarantee the municipal bond payments for investors.

And then they rake in all those fees year after year simply by maintaining ratings that are often based on grossly outdated data.

Now, that municipal bond ratings farce — based on payola and riddled with conflicts of interest — is collapsing for three reasons:

First, it’s collapsing because the entire concept of municipal bond insurance — riddled with the same conflicts — has crumbled, just as I warned in The Ultimate Safe Money Guide.

Two of the largest bond insurers — Ambac and FGIC — are already bankrupt, with FGIC now subject to possible liquidation by New York State regulators.

And MBIA Inc., the only surviving bond insurer among the Big Three, has just been downgraded by three notches to B- — deep into junk territory.

Result: Hundreds of thousands of investors who bought insured bonds are now vulnerable. They thought they were buying protection against default. Instead they got little more than a pig in the poke.

Second, it’s collapsing because many cities are years behind in providing accurate financial data … while their finances have deteriorated in a matter of months.

Consequently, a large portion of the data is not only grossly outdated … it’s downright wrong, failing to properly reflect the recent sharp deterioration in local finances.

Third, the muni bond ratings farce is collapsing because of the disastrous situation on the ground. Consider these excerpts from 60 Minutes:

In the two years since the “great recessionâ€

Yup
The money is almost gone but I don't hear a word about cutting off bennys to illegals?

Or deporting illegals and giving their jobs to people on the welfare rolls

If I was in charge

Every illegal would be gone , Every welfare person would have a job , either they worked or welfare would be cut off

If some needed supplemental welfare to make it , not a problem , just so they were putting in 40 hours a week , Just like I did the last 40 years