A black swan event is, by definition, an unforeseen catastrophe. I would say that the housing bubble collapse of 2008 was a black swan event. None of the so-called experts saw it coming; not the then Treasury Secretary or the Fed Chairman or the President or anyone in Congress. Well, Ron Paul claims to have sounded the alarm but nobody listened if he did. Now I am wondering if municipal bankruptcies could be the next black swan event to plague the US economy.
In June of this year, Financier World moderated a panel discussion on the subject of the potential of municipal bankruptcies with three financial analyst: Doug Mintz at Cadwalader, Mark N. Berman at Nixon Peabody LLP, and John Wm. Butler, Jr. at Skadden, Arps, Slate, Meagher & Flom LLP. The analysts were asked if they foresaw a wave municipal bankruptcies. Here are abbreviated quotes from the three gentlemen:
Butler: No. Despite the financial problems facing municipalities in recent years, and contrary to some commentators who have predicted widespread failures, there has not been any material increase in municipal bankruptcy filings nor do we see that changing.
Berman: Not a wave, but there may be an increase from historical norms.
Mintz: The ‘wave’ of bankruptcies has not materialised and will not materialise for a number of political, business and legal reasons. First, the economy has improved in 2011, reducing the pressure on municipalities’ tax base.
Well, these experts didn’t see any reason to worry. But, I wonder if they still feel the same way today? Just one month later there was this article at Bloomberg that said:
Moody’s Investors Service placed 177 top-rated municipal-bond issuers with a combined $69 billion of debt outstanding on review for possible downgrades as it evaluates its Aaa rating of the U.S. government.
And then in August Bloomberg has this report:
Standard & Poor’s lowered the AAA ratings of thousands of municipal bonds tied to the federal government, including housing securities and debt backed by leases, following its Aug. 5 downgrade of the U.S.
Today it is all over the news that Jefferson County, Alabama has filed the largest municipal bankruptcy in US history at $3 billion. You can read about it at the Wall Street Journal and also at CNNMoney.
Could this be the first major municipal bankruptcy of many more to come? Will the decision of Jefferson County trigger other municipalities to seek the same solution? Is there a black swan coming our way? Food for thought I would say.
Well, that’s what I’m thinking. What are your thoughts?