Monday, March 09, 2009

Ch 9 Primer

Chapter Nine? WTF is Chapter 9?

Municipal Bankruptcy.

Get ready or get buried. Look, This link is how it is supposed to work. Note the following passage:
The purpose of chapter 9 is to provide a financially-distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts. Reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan.

• extending debt maturities
• reducing the amount of principal
• reducing the amount of interest
• refinancing

Got that? There is no authority for new taxes. Good news but unfortunately the only good news. Reading further:
Different types of bonds receive different treatment in municipal bankruptcy cases. General obligation bonds are treated as general debt in the chapter 9 case. The municipality is not required to make payments of either principal or interest on account of such bonds during the case. The obligations created by general obligation bonds are subject to negotiation and possible restructuring under the plan of adjustment.

Special revenue bonds, by contrast, will continue to be secured and serviced during the pendency of the chapter 9 case through continuing application and payment of ongoing special revenues.

GO (General Obligation) debt is worthless. Stand in line with all the other debtors. Special revenue bonds are only protected to the limits of revenue received. Reassuring no?


Property Flopper said...

Would I be the FIRST to say that cities are going to have a hard time getting ANY funding if they default on their bonds... even once.

Agent #777 said...

I hate to say it, but I think I have a close family member who wants to buy munis. But maybe that won't happen until the house is sold - and THAT isn't happening anytime soon!

Bob said...

You mean those AMBAC & MBIA stamps on the bonds aren't any good?

Unfortunately it's a race to see which collapses first, the credit card issuers or the municipal bond market. All very ugly.

Anyway, I'm sure this guy is available to run the new improved nationwide MAC.

Property Flopper said...

OK - So where the hell can I put cash these days?

Seriously... the wife got a "healthy" (read: phenomenal) bonus this year. We're looking to put that somewhere. Also have some cash sitting in CDs (5%, can't complain), but those will come up in a little while

Stocks are still scary, real estate hasn't hit bottom yet, t-bills are paying crap (aren't they always?) and muni bonds are looking like they'll default.

Where is a good place to put money these days? Some I'd like to put away for 3-5 years, some I'd be happy locking away longer.

Where do y'all have assets? Is anything out there safe with at least a decent return?

Peripheral Visionary said...

A discussion of muni bankruptcies and no mention of pensions? Where general obligation bonds stand with respect to special revenue bonds isn't quite as important as where pension and healthcare plans are in line.

Pension plans are the bachelor uncle at the family reunion dinner buffet; whether or not you eat depends on whether or not you're ahead of him in line.

Peripheral Visionary said...

@PF: Money market funds are guaranteed by the Treasury and have decent returns, which is to say that they have a positive return (asking for anything more in this market is pushing your luck.) Your money isn't locked up, and their returns should float with market rates, albeit with a lag. They typically purchase one month to six month notes, so the rates will adjust more or less in line with market rates.

Don't put your money in "Government" money market funds, which often hold Treasuries that have virtually no return. "Prime" funds have the best return. The Treasury's guarantee program is "temporary", but we all know what that means. Even so, it'll be safe for at least six months, and if (as is likey) the "temporary" program is extended, you can keep it there longer.

Rob Dawg said...

Property Flopper,
The tip jar is always open. ;-)
Just kidding. Seriously, you ask the $9 trillion dollar question. The short and therefor unhelpful answer is places where it cannot be "evaporated." There's whole bunches of places where that's possible but understand there are no more guarantees. That's one of the new "features" of the post bubble economy.
1. There are good stocks. There are good companies. They are not coincident groups.
2. Returns from stocks are suspect.
3. Every day of deflation will be tacked on the end of future inflation.
4. Commodities have not been investments for more than 30 years but the notion persists.

Real estate is getting interesting. There's a property in my "canary zone" that looks to cash flow quite handsomely. Heck, all those people who invested in income property in Dallas or Austin or KC or OKC in 2006-2008 are fat dumb and happy (for now). I was wrong about this. I did not expect the actual price appreciation and strong pricing rent authority to date. Still urban California is absolute poison despite the false sunshine from San Diego. That's just rats claiming the highest mast on a sinking ship.

Before all that I'd invest in "positioning." Have good cars, reliable energy efficient appliances, etc. so you can "sit tight" if necessary.

Property Flopper said...

Rob - Sure, I'll put her bonus into the tip jar. I could just imagine what her comments on that would be...

As far as positioning, we're there. We did a major remodel of the house (actually, more of a rebuild). All nicely insulated (old house was not), all new appliances, etc. Both cars are new-ish. Hers is ~5yrs old, mine is ~3, both planning on keeping these until they hit 10yrs or so.

Only thing we owe on is the house, a 200k balance on a ~800k place (was a million before all this started, but...). It's a fixed 5% loan (9 more years), so it's not really worth paying off.

Real estate - For a rental place, I want something reasonably close so I can keep an eye on it. SF Bay Area though... prices are still not quite in line with reality. We have thought of getting a vacation place, something we could use but also rent out by the week when not in use (most of the time). Looking in to that, but not sure we want to do that quite yet. That's why part of the money would be for 3-5 year lockup.

Sadly, it's looking like "not losing money" is the best place to keep it.

For stocks - I do like GE (even with the financial arm sucking) and P&G. Both trading low, both fairly solid companies underneath.

Peripheral Visionary said...

PF, if you're going to buy a vacation home, don't count on much, if any, secondary income. Most vacation zones became severerly overbuilt over the last decade, and I fully expect weekly/monthly rental rates to absolutely collapse. We may even see the return of the Old Western ghost town, albeit this time a result of the collapse of finance rather than the silver lode running out.

Cash isn't a great place to be, as inflation is going to be an absolute monster when it breaks free, but there are worse places to be. You might want to put the money toward a good cause; you won't get it back, but karma is inflation-proof.

NHSteph said...


Rob Dawg said...

You know you are shouting "commodities!" in a crowded asset room.

Why glod? Just because it is off? Again. Because the Platinum spread is unusually wide? Demand? What?

NHSteph said...

Actually, I'm a silver fan myself.
Cheaper entry point, more upside.

With gold, I stick to mining stocks so I can get in and out quickly.

Why? Mostly because it's shiny, but also because I am an end-of-days, tinfoil hat, fiat currency, Wiemar Republic nut...

...and I cannot see how we avoid hyperinflating our way out of this.

That being said, I am enjoying this period of deflation-- it's giving me lots of time get the "sitting tight" portion of my life in order-- good cars, new appliances, koi, etc.

Son of Brock Landers said...

@PF - I've been dipping my toe into the market at random intervals when I see something that strikes me as a decent buy. soem have done OK, some have burned me a bit. One place I have found interesting opportunities is in preferred stocks. I'd stick with a prime money market fund for capital preservation unless this is extremely long term money. That's where my cash is. I've got a long horizon (just under 30) so I havce been more aggressive than my coworkers who are sweating retirement.

Son of Brock Landers said...

@PF - I've been dipping my toe into the market at random intervals when I see something that strikes me as a decent buy. soem have done OK, some have burned me a bit. One place I have found interesting opportunities is in preferred stocks. I'd stick with a prime money market fund for capital preservation unless this is extremely long term money. That's where my cash is. I've got a long horizon (just under 30) so I havce been more aggressive than my coworkers who are sweating retirement.

Pleather Murse said...

I don't dip in randomly, I'll dip in on a day when the market takes a really nasty dump, like the other day when it was down 200 points or whatever, then get out with the inevitable bounce a day or two later. I got some UYG (2x financial ETF) the other day at $1.38, sold it today at $1.83. 32% in a couple of days, not bad. ;)

w said...

You are right Rob. Gold is not an investment it is a hedge. If everything gets better gold tanks but my income will still be there. If things go to hell gold will spike and cover me for a while.

Personally, I am betting that things keep getting worse for years to come. Fear of where to put your money will continue the gold meme for a while.

I imagine that people with wealth in places like Russia, Brazil and China are wondering where the hell to park their money and not have it all confiscated by the government or currency "events". Some of that will find itself in gold.

w said...

Besides, is there any way Citi really turned a profit without some type of gimmickry? When word gets out it should be good for a -379 down day

Rob Dawg said...

If you parse Pandit's words carefully he basically said "operating profit" not real profit.

NoDebt4Me said...

PF-Personally when my CD's matured I decided that paying off the house was the best, if not ideal way to go. Where else can you get a 100% safe nontaxable 5% return?

Property Flopper said...

NoDebt4Me - I suggesed that, the wife wants to keep more flexibility, she doesn't want too much tied up in the house. Good idea though, I'm still leaning that way.

Son of - Been looking into a few stocks, thus far most of what I come up with stinks in some way. I've got a long time to wait for most of the money, so I may put some in stocks I know will survive and see how they perform (PG comes to mind).