|
Junkie
|
Here we go again! Barney Frank is an example of a man with a little knowledge thinking he understands a complex issue and is then going to "fix" things. He is definitely a person not to trust, meddling in "big business".
Quote:
Barney Frank's track record as a financial analyst is, shall we say, mixed. The House Financial Services Chairman said for years that a collapse of Fannie Mae and Freddie Mac would pose zero risk to taxpayers. For most people, a mistake of that magnitude would trigger introspection, if not humility. But not the sage of Massachusetts. He's cooking up another fantastic subsidy -- and like the last one, he swears taxpayers won't feel a thing. In his words, "it would cost the federal government zero." Uh oh.
Mr. Frank believes state and local governments are paying too much when they issue debt because rating agencies don't give them the ratings Mr. Frank feels they deserve. So last year he pushed a bill to effectively force Standard &Poor's, Moody's and Fitch to raise their ratings on municipal bonds, but the legislation got sidetracked amid the financial turmoil. Now Mr. Frank is back, bigger than ever.
He'd like to create what he calls an FDIC-like federal insurance program for municipal bonds. Jurisdictions issuing debt would pay premiums into the insurance fund, and in return the federal government would guarantee the debt against default. Private companies already insure municipal bonds -- companies such as MBIA, Ambac and Berkshire Hathaway. And you may recall that last year the big bond insurers caused considerable angst when their exposure to mortgage-related debt called into question their ability to meet their muni-bond obligations. MBIA, in response, recently fenced off its muni-bond business from its other obligations.
If Mr. Frank really believes that state and local governments have been forced to overpay for this insurance, one has to assume his federal program would charge lower premiums and so undercut its private-sector competitors. The government can charge low premiums without putting taxpayers on the hook, he argues, because the risk of default is so low.
Or is it? The payment history of municipal bonds seems to support Mr. Frank. But then the triple-A ratings assigned to many mortgage-backed securities were also based on backward-looking models that failed to anticipate today's housing bust. The muni-bond performance record is also mostly the history of uninsured bonds. But the very existence of insurance can change the behavior of the policyholder or beneficiary -- watch Barbara Stanwyck and Fred MacMurray in the 1944 classic "Double Indemnity." If a state or locality knows someone else will make bondholders whole, they are far more likely to default than an uninsured issuer would be.
Many states and localities have run up huge pension and health-care obligations to retirees that will come due over the next few decades. And many of those obligations were underfunded even before the bottom fell out of the stock market. When those bills hit, cities will have to choose among raising taxes, cutting benefits or stiffing bondholders. In some states, such as New York, retiree benefits are constitutionally protected, and taxes are already chokingly high. So stiffing the bond insurers will look pretty attractive.
None other than Warren Buffett devoted several pages in his latest Berkshire Hathaway shareholder letter to precisely this kind of risk: "When faced with large revenue shortfalls, communities that have all of their bonds insured will be more prone to develop 'solutions' less favorable to bondholders than those communities that have uninsured bonds held by local banks and residents."
He continues: "Losses in the tax-exempt arena, when they come, are also likely to be highly correlated among issuers. If a few communities stiff their creditors and get away with it, the chance that others will follow in their footsteps will grow. What mayor or city council is going to choose pain to local citizens in the form of major tax increases over pain to a far-away bond insurer?" This goes double if the insurer is Uncle Sugar.
Mr. Buffett concludes: "Insuring tax-exempts, therefore, has the look today of a dangerous business -- one with similarities, in fact, to the insuring of natural catastrophes. In both cases, a string of loss-free years can be followed by a devastating experience that more than wipes out all earlier profits."
The difference, in this case, is that bond insurance, and especially federal bond insurance, would have helped create the "natural" catastrophe by encouraging jurisdictions to rack up obligations that taxpayers would be forced to make good on down the road. As for Mr. Frank's contention that muni-bond insurance is too expensive, Berkshire Hathaway is charging two and three times historical rates -- and Mr. Buffett is still worried.
One Fannie Mae debacle ought to be enough for any career, but Mr. Frank wants taxpayers to double down on his political guarantees. There are currently some $1.7 trillion in municipal bonds held by the public, and Barney thinks we can insure them at "zero cost." Considering the source, and the potential size of the bill, someone in Congress needs to sound the alarm.
|
Barney Frank's Double Indemnity - WSJ.com
If Frank has his way, remember you heard it here first, tax payers are going to get hammered with another bailout crisis in about 5 to 10 years.
__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."
|