60 Minutes: Fate of State and Local Governments
Just curious to hear what people think of the clip that just ran on 60 minutes regarding the underfunding of government projects and liabilities for pensions at the government and state level and what the resulting maelstrom will be like
secondary note : are there CDS on munis?
I just posted like the exact same thing. Weird..
short blackrock
my post came first :> and has a cooler title
this post wins because of the better title...
It will be a catastrophe, the Feds will have to print money to bail them out.
Don't buy CDS, you probably won't collect because of one of two things:
The real problem here is that it could trigger a run on Fed paper...
I'm almost certain there are no cds on the muni's
you might be able to get into a short contract with someone though, idk who would take the long...
You could probably get someone to write you one OTC if the price is right...
I'm pretty sure that there could be CDS on munis because they are not default free like treasuries. Also, there are different types of munis. There are General Obligation munis which are the most risky because they rely completely on the municipality raising funds through taxation and fees. Other munis have a designated revenue stream--such as revenues from a local park, which are safer.
@alexpasch--a firm doesn't need to default in order for a person to make money on CDS. You make money on CDS just by the credit spread widening.
You are right, because default risk goes up so the price of CDS goes up, but liquidity is an issue here and if it's a made-to-order OTC product, you're probably not going to be able to sell it without a big discount (so you're probably just going to hold it until it expires and either they default, or you get nothing).
Who the hell do I call to buy CDS? My Edward Jones advisor?
It would be extremely difficult to make money off of a CDS trade because while they do exist 1) you would need a lot of money as an individual to acquire them (think tens of millions) 2) you would have to find someone to go long (banks know the muni market could start to blow up) and 3) even if you got in on a CDS trade I agree with alex, because they wont likely default in most cases there isnt as much money to be made as you might think, its true that you can then just sell it to someone else once the spread widens but it would be difficult to find a buyer, since the companies trying to acquire the short position are not going to be interested in your single contract.
Better off just shorting muni etfs probably.
Joe Cassano said the same thing about CDS on MBS CDOs.
What are the drawbacks to muni etfs?
Your all arguing on the validness of CDS's as a trade. When probably none of you will ever be able to do such a trade.
Who do you think does these trades? Maybe not tomorrow, but definitely at some point not too far off...
I think you underestimate the caliber of a lot of the individuals that fiddle around on this site...
Your at a fund, my bad you prolly can. Bondard prolly can. Those on prop desks can.
For the most of the other folk, I still doubt they could.
It actually wouldn't be too hard. Here's how I would do it: Create a fund of the CDS's of all the major institutional and bank holders of municipal bonds in proportion to their exposure (this can be estimated in a number of weighs but probably the easiest would be to do it by total value of municipal bonds over total valuation of firm). Then package this as an ETF and sell it to the public. If there is a hit in muni's and you've (hopefully) correctly weighted the portfolio then it should pay off. It might take some more finessing than this, but hey you get the idea.
Oh and hey Thomson Reuters eMaxx has numbers for large institutional holders 1 and large bank holders 2. And, as it turns out, about 2/3 of all munis are held by these two groups, while the rest are held by US households 3. If you really wanted to get fancy you could try and factor in the households by assuming pensioners will default on their house payments if munis go under, weight the default rate by the muni bond holding by state, correct for local market conditions, correct for the health of the state, and BAM buy something inversely correlated to those housing prices and roll it in with the rest of the ETF you're making.
But that's just off the top of my head.
1http://www.bondbuyer.com/media/pdfs/040910InstitutionalHolders.pdf 2http://www.bondbuyer.com/media/pdfs/040910500banks.pdf 3http://content.municipalbonds.com/2010/02/06/faq-frequently-answered-qu…
A lot of them tend to be a broad range in terms of geographical location. If you have strong conviction that a particular area of munis will be in trouble you would be better off going with a less diversified closed end fund or ETF. Here is a good page with links at the bottom to even more resources. Good selection for further research:
http://seekingalpha.com/article/30356-a-guide-to-municipal-bond-etfs-an…
I disagree with Gekko21. GO bonds are less risky than revenue bonds - states are screwed if they can't borrow through wholesale markets so they will do everything they can to avoid default, i.e. raise taxes, whereas there is no guarantee on the revenue stream from IDRBs.
we should all pool are money and short treasuries
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