Enemy Action in Munis

Once is happenstance. Twice is coincidence. Three times, it’s enemy action.

—Auric Goldfinger, quote from Goldfinger (1959)

Leaving aside Vallejo’s bankruptcy of a while ago, municipal bond investors have been hit with a rat a tat tat of three California municipal bankruptcies in short order.  Stockton, Mammoth Lakes, then San Bernardino.  The last of these had a disconcerting aspect, from Reason:

San Bernardino City Council voted 4-2 in favor of filing Chapter 9 bankruptcy Tuesday night. The most surprising little detail (and one that seems to be getting lost in all the numbers) came from City Attorney James F. Penman, who told City Council that it had been getting falsified budget numbers for years. Via The Sun San Bernardino):

Penman also said at the meeting that for 13 of the last 16 years, the council had been given falsified budget documents. Those documents said the city was in the black when, in fact, it had been deficit spending, he said.

That period covers the tenure of multiple city managers and sets of elected officials, but it predates Acting City Manager Andrea Travis-Miller and Finance Director Jason Simpson, whom he said discovered the discrepancy.

Travis-Miller’s report (pdf) for City Council showed that city reported starting the 2011-12 fiscal year with $2 million in the general fund when in fact it was already $1 million in the hole.

Hmmm.  More fraud.  Where is there an end of it?

This three-peat run of Cali-ruptcies “did it” for me.  No more muni funds with unknown securities lost in the portfolio.  The ride was a profitable one.  Time to only own what you can identify and understand, and to focus on only the highest quality issues.   

Italy and Spain were not Greece until suddenly they threatened to become Greece, and we should remember that it took a while for Greece to become Greece.  If the stuff hits the fan in the U.S. economy, as even a mild recession may cause, I would expect most munis to be treated like “Spitaly” and the perceived best of the bunch to be treated like Germany.  Thumb up or down, a la ancient Rome.

If you think yields of AA-rated and higher munis are “too low” right now to be worth bothering with, please note:  Japan’s 10-year bond has plummeted to 0.77% as of today.  It was as high as 1.10% or so this winter. 

Matters are so strange that even Japan is going Japanese once again.