Moody's: More Calif. cities at risk of bankruptcy; Warren Buffett cuts bet that municipalities will not default by $8 bn

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    Aug 22, 2012 1:37 PM GMT
    Just remember who it was who opposed measures to give cities the tools to rein in their budgets in Wisconsin. Of course liberals here would rather people focus on tax returns, ridiculous gaffes, etc.

    One of the nation's top credit rating agencies said Friday that it expects more municipal bankruptcies and defaults in California, the nation's largest issuer of municipal bonds.

    Moody's Investors Service said in a report that the growing fiscal distress in many California cities was putting bondholders at risk.

    The service announced that it will undertake a wide-ranging review of municipal finances in the nation's most populous state because of what it sees as a growing threat of insolvency.

    The report has both investors and government leaders worried.

    Three California cities — Stockton, San Bernardino and Mammoth Lakes — have filed for bankruptcy so far this year. They are not likely to be the last, Moody's said.

    Moody's reports that some cities are turning bankruptcy as a new strategy to take on budget deficits and avoid obligations to bondholders, an emerging dynamic that could have ripple effects throughout the investment community.

    The municipal bond market has long been characterized by low default rates and relatively stable finances, Moody's said, but that outlook is beginning to change as bankruptcy becomes a tool for cash-strapped cities.

    As a result, the agency will reassess the financial position of all cities in California, which issues about 20 percent of the municipal bond volume nationwide, "to reflect the new fiscal realities and the governmental practices."

    The agency also will examine the outlook for municipal bonds in other troubled states, according to Robert Kurtter, managing director of public finance at Moody's.

    Moody's would not say which states it will review, though Kurtter mentioned Michigan and Nevada as possibilities. Friday's report noted that cities across the country are in financial distress but said that a greater share of bankruptcies are expected in California.

    More here:

    Berkshire Hathaway Inc will terminate $8.25 billion in credit default swap protection it has sold on municipal debt, more than half of a total $16 billion in protection it has sold on bonds of states, cities and towns, the company said in a regulatory filing this month.

    The move comes as many investors, including Berkshire Chairman billionaire investor Warren Buffett, foresee an uptick in U.S. municipal bankruptcies.

    Buffett said last month that the bankruptcies of three California cities in as many weeks was making traditionally objectionable Chapter 9 municipal bankruptcy filings more palatable to local governments in financial crises.

    Berkshire sells protection against the default of states, towns and cities using credit default swaps. In these contracts the company would be required to reimburse its counterparty for debt losses in the event of a municipal bankruptcy.

    Berkshire said in its filing that it reached an agreement with a counterparty to terminate $8.25 billion of the CDS portfolio, which references more than 500 state and municipal debt issuers. It did not name the counterparty to the trades.
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    Aug 22, 2012 5:49 PM GMT

    Warren Buffett's Berkshire Hathaway has scaled back its bullish stance on municipal debt, but this shouldn't be a surprise to those who have followed Buffett's remarks.

    Munis beware. So suggests one of the world's savviest investors.
    Warren Buffett's Berkshire Hathaway (BRKA) recently terminated credit-default swaps insuring $8.25 billion of municipal debt, according to the company's latest quarterly SEC filing. The original bet was a bullish one -- in the event the municipalities defaulted on their debt, Berkshire would have to pay out. The move to terminate those contracts may have made some investors more skittish about the finances of U.S. states, cities and towns, but this shouldn't come as a surprise to those who have closely followed Buffett's remarks.

    Since at least 2009, Buffett has warned about the risks of insuring municipal bonds. In his annual letter to shareholders, he said rather than raise taxes to fill budget gaps, government officials might be inclined to default on bonds whose payments are guaranteed by insurance companies. Guaranteeing munis against default, he wrote, "has the look today of a dangerous business -- one with similarities, in fact, to the insuring of natural catastrophes."