John Hallacy, Head of Municipal Research at Bank of America Merrill Lynch Global Research recently said “municipal bankruptcy is a gut-wrenching process, there’s nothing easy about it.”
I, however, respectfully disagree.
Now, don’t get me wrong, I didn’t say that municipal bankruptcy wasn’t a difficult decision to come to.
In fact, I believe that for Stockton, California, the largest U.S. city to enter bankruptcy, it was a very difficult decision to make.
I can just imagine Stockton’s governing body spending many long nights debating, arguing, and just plain wrestling with the idea of economic failure.
I’m sure they pondered the following questions: What would the impact be? What about future funding repercussions? How would we be perceived nationally?
These are all very significant questions that demanded very honest answers.
But think back to the very first person who executed a residential mortgage short sale. Somewhere, someplace, that person exists.
He or she must have struggled mightily with some very serious issues as well. What would their family members, friends, neighbors, and co-workers think of them as they walked away from responsibility, an obligation, and a binding contract?
The consequences could be monumental.
Once, however, the first person does it, it becomes easier and easier for the next person. Today, a short sale, which not long ago was only known as a bearish stock strategy, is now considered an accepted practice in real estate.
Therefore, the Stockton town fathers (and mothers) have set the precedent for what I believe could be a fairly straightforward procedure for every municipality.
As real unemployment continues to rise and foreclosures escalate, the tax base will continue to erode. And this small tax base needs to support not only existing services such as police departments and fire departments, but also healthcare and pension benefits for the future.
The existence of a zero interest rate policy (ZIRP), which inhibits most municipalities from achieving their actuarial assumptions, combined with a declining revenue base makes the math very easy to figure out.
Quite simply, revenues don’t match expenses.
Accordingly, Mr. Hallacy might be right. The process may be gut-wrenching, but the decision gets easier.
Indeed, Meredith Whitney’s 2010 prediction that our nation is on the verge of colossal municipal bond defaults may be getting closer and closer to reality.
Therefore, all municipal bondholders take notice.
It gets easier and easier to do a short sale, declare bankruptcy, and even default when the precedent has been set.
No one or nothing is immune.
Along with his 40-years of dedication in the financial services industry, Bill is the President and CEO of GPSforLife, has recently authored a highly successful book entitled 44th: A Presidential Conspiracy, publishes his dynamic monthly financial newsletter MacroProfit, and faithfully continues his third decade on the radio with It’s All About Money, which can be heard weekdays on Money Radio in Phoenix and in podcast form on his website (and on smartphone apps) published at billtatro.com weekdays at 5pm Eastern. Bill can be reached via email at firstname.lastname@example.org and on Twitter @tatroshow.