Municipal Bankruptcies _ The Next Black Swan?

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?






24 thoughts on “Municipal Bankruptcies _ The Next Black Swan?

  1. Hmmm…let’s see. Should I stuff my mattress with cash that will be one day rendered useless, or should I stock up on canning jars, food, water, gasoline, a generator, and bullets?

    I bank at a local bank, but even so I fear for the safety of my money. Or should I say, “I fear for the safety of the government’s money that they so graciously allow me to steward”?

  2. Harrisburg, PA has gone chapter 11, I think I read. Nine cities so far are in bankruptcy. The explanation for this is stupidity. Our city, for example, has refinanced bonds, mortgaging our fire stations in order to borrow millions more for a white elephant conference center, citing “economic development” as the reason. The mind-blowing insanity for this is “we will attract tourism.” “Build it and they will come.” I don’t know who they think is coming, but it would have to be the “second coming” to make this thing viable. All of this borrowing has been recommended by city managers and urban planners who have no skin in the game whatsoever. In fact, they get paid handsomely to come up with these baubles and boondoggles paid for by broke citizenry. It all lands on the taxpayers, who, as you know, are being skinned alive with inflation and taxes right and left.

  3. I love the term being used now “Hair Cut” as if we are all stupid. Same as “Revenue enhancements”. I would like to see the OWS folks answer this question and concern. There are trillions of dollars outstanding. Between pensions and governments going under, I think that Chakam is on the right track.

  4. This morning’s newspaper here tells us that our police chief who, by the way is a duplicate job because we have two different police departments, makes over $103,000.00 per year retires at full salary for life after 30 years on the force. ( Deputy Police Chief makes $88,000.00 ) (city size 70,000 people) ( two police departments) One police chief is retiring after 3 years on the job and now hiring the next one at the same salary. Makes me wonder how many $103,000.00 retirements we can afford. If they all retire after 3 years and live long happy lives …we could be paying a whole lot of money for retired police chiefs. They are not barred from going on to find other employment elsewhere while they receive this compensation, either. So….if they started at, say, 24 yrs. old and retire at 54 yrs. old, ….well, you get the point.

    1. Makes me want to go to the police academy 🙂 OH governor warned OH municipalities Tuesday night after votes voted down his law against collective bargaining that the state would be in NO position to help them financially.

  5. There will be municipal bankruptcies. But the public will never favor tightening budgets. They will always blame the Republicans and ask for taxes to be raised. Which will cause people to move causing further bankruptcies etc etc.

    Welcome to the United States of Failed Socialist Municipalities.

    Sorry. Wish I could be more optimistic but we are boned.

  6. State governments tightening their belts will help some cities along. I actually think most will be okay unless the economy goes back into recession. Excuse me, when the economy goes back into recession.

  7. I don’t think it’ll be a black swan event, at least it shouldn’t be. For years and years people have warned that out of control spending will end in tears, it’s just common sense.

    I suppose if people are too stupid to see what’s plainly obvious then it will be a black swan, shocking horror, never expected this, type of event.

    Mind you, liberals should be used to these, seeing as how most of their plans always go up in flames, crash and burn or turn to sh!t.

  8. This ought to get interesting. With the union thugs and now OWS increasing costs in so many locations, how long will it be until more cities and municipalities go belly up?

  9. I agree that this does not appear to be a true black swan. It is predictable. Government at all levels in the US has been awash with debt. It is inevitable that they will either have to deal with their debt problems, or crash.

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