Corruption+Derivatives+Munis = big blow-ups

Municipal Bond market is not as ‘safe’ a haven as I thought it was..paybacks to politicians, entanglement with Swaps and other derivative products without due dilligence, have all but resulted in increasing credit risk of municipal bond issues. Heard that few counties are on the verge of going bankrupt after interest rate swap deal went bust recently..for more, here’s the scoop
http://www.nytimes.com/2009/01/09/business/09insure.html?_r=3&ref=business&pagewanted=all

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2 responses to “Corruption+Derivatives+Munis = big blow-ups

  1. The trick to munis are the fact that many of them don’t have covenants that allow them to retire the debt early. Those munis that have enough money to pay back the debt yet can’t retire the debt buy US treasuries and sit on them. The deals with munis come when you have this situation where you get higher returns (in part due to pricing, in part due to the fact they aren’t taxed at either the state or federal level) that are riskless (because the debt is now backed by treasuries).

  2. The trick to munis are the fact that many of them don’t have covenants that allow them to retire the debt early. Those munis that have enough money to pay back the debt yet can’t retire the debt buy US treasuries and sit on them. The deals with munis come when you have this situation where you get higher returns (in part due to pricing, in part due to the fact they aren’t taxed at either the state or federal level) that are riskless (because the debt is now backed by treasuries).

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