Explaining Southern California's economy

Things are getting tense in the municipal bond market

Residents make their way in and out of t

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San Bernardino is the latest California city to declare bankruptcy. Is this the beginning of the end of the once-sleepy, rock-solid municipal bond market?

It's hard to tell if this is just general nervousness after a rally or a legitimate reason to worry about an impending wave of defaults on municipal bond debt — something that has basically never happened. But in the span of a few days, billionaire investor Warren Buffett has unloaded $8.25-billion in credit default swaps on muni debt.

Buffett's Berkshire Hathaway sold the CDS to Lehman Brothers prior to the investment bank's epic bankruptcy four years ago, a Chapter 11 for the ages considered by many to be the thing that kicked off the Great Recession. Buffett's CDS amounted to a bet that cities wouldn't default on their debts — a prediction that for the most part has turned out the be true.

However, over the past few months, three California cities — Stockton, Mammoth Lakes, and San Bernardino — have declared bankruptcy. The ratings agency Moody's has stressed that muni defaults are exceptionally rare (as long as the bonds are rated; the Federal Reserve Bank of New York recently noted that unrated defaults happen more frequently, although they're far from common). But Moody's has also announced that it's conducting a review of the debt of cities in California, in light of recent events.


California city bankruptcies are raising questions about the municipal bond market


Federal Reserve Bank of New York

Last month, I wrote about Moody's, one of the big ratings agencies, and its view that the municipal bond market was getting a bit riskier than everyone has conventionally thought, in the aftermath of the bankruptcies of Stockton and San Bernardino and other U.S. cities. 

At the time, I noted that between 1970 and 2011, Moody's could find only one city — Cicero, New York — "electing to default on debt not out of ability to pay but willingness to pay."

What that implies is that the now $3.7-trillion muni bond market has been a safe investment for decades. As long as you're investing in rated bonds. (And even if you haven't, but more on that in a sec.)

Now the Federal Reserve Bank of New York has offered its own take, at its Liberty Street Economics blog. It differs from Moody's in terms of the looking at the entire muni market, not just the part that's rated by Moody's and others. The conclusion is represented in the graphic above. Moody's found 71 defaults between 1970 and 2011 — and that's total defaults in its rating universe, so presumably 70 we due to inability to pay while only Cicero strategically defaulted due to an unwillingness to pay.


California and Stockton top foreclosure statistics nationwide


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For sale signs are posted on a foreclosed house in Glendale, California. Foreclosures in the state are falling, but it still had the worst rate in July.

Sometimes, the good news and the bad news are the same thing. That's the takeaway from the July 2012 foreclosure report that Irvine-based RealtyTrac just released. According the the foreclosure marketer's crunching of the numbers, California had the country's highest foreclosure rate in July, with "one in every 325" homes at risk of reverting to bank ownership. That's despite the foreclosure rate dropping in California by 11 percent since June and 25 percent since June of 2011.

Like I said, good-bad news.

Meanwhile, at the municipal level, California sports the top four cities for foreclosures, with Stockton — now bankrupt — topping the list, with one in every 135 homes in foreclosure. Vallejo-Fairfield, Riverside- [also bankrupt] San Bernardino-Ontario, and Modesto follow Stockton. Then in come Palm Bay-Melbourbe-Titusville and Tampa-St. Petersburg-Clearwater (numbers five and nine, respectively) in Florida to break up a sweep of the top ten by California's beleaguered cities.


Orange Country Register sale to Boston-area investor closes


The Orange Country Register's parent company, Freedom Communications, has been officially acquired by 2100 Trust LLC, headed by Massachusetts businessman Aaron Kushner.

The last pieces of Freedom Communications, including the Orange Country Register, have been sold to 2100 Trust LLC, an investment group led by Aaron Kushner, a Boston-area business man who initiated the purchase last month.

I took a stab at figuring out how big a deal this was, but no confirmation of my back-of-the-envelope math is forthcoming, as the deal size wasn't disclosed by Freedom or Kusher's group. The OCR's Mary Ann Mibourn did confirm an aspect of the purchase:

As part of the deal, Freedom Communications will make an additional one-time contribution to the company's retirement plan. The amount of the contribution was not disclosed.

This contribution was reportedly a dealbreaker for U-T San Diego owners Doug Manchester's ambitions to own two papers in Southern California. It could be a significant amount of money, beyond what 2100 Trust paid for the remnants of Freedom. As I wrote last month:


California cities top foreclosure statistics in first half of 2012

Stockton, CA Leads Nation In Rate Of Foreclosures

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Cars drive through downtown Stockton. The bankrupt California city continues to have the nation's highest foreclosure rate.

According to RealtyTrac, a real-estate service that focuses on foreclosures, California continues to endure some of the highest levels of foreclosure activity nationwide, with seven cities in the top 10. Stockton, which recently declared bankruptcy, topped the list. One in 38 homes there is in foreclosure.

San Bernardino, a city that's headed toward bankruptcy, also made the list: its metropolitan area, which includes Riverside and Ontario, ranked number three. And Vallejo fell into a metro area, including Fairfield, that came in at number four. Vallejo declared bankruptcy in 2008 and emerged last year.

Detect a trend? It's worth noting that Both Stockton, San Bernardino, and Vallejo are all older charter cities, and that for these municipalities, a cratered housing market has been a major factor in their march to fiscal crisis and Chapter 9, the municipal equivalent of Chapter 11.