On a regular basis over at least the past decade, radio host and newsletter publisher Bob Brinker would be asked about the safety of investing in government securities (other than US Securities).
One piece of advice he gave out was to be sure you understand what you’re buying – is it a general obligation bond that is guaranteed by access to the general revenue stream of a city or state or is it a revenue bond – one sold by a quasi-government agency which has only the revenue generated by the facility it runs to pay back the bonds (like a convention center, sewage plant, sports stadium) and doesn’t carry the full faith and credit of a government. Obviously, a revenue bond carries much more risk.
When asked about California General Obligation bonds on repeated occasions Bob would say “Nobody in the entire history of the United States has EVER lost a dime investing in the general obligation bonds of a state”.
The New York Times is reporting activity in Washington DC and the large firms that specialize in bankruptcy, looking for a way for California to go through a bankruptcy-like process (ala Tim Geithner and GM – where he waves his hands and everyone ignores the law). Given the precedent, look for a “solution” that puts the pension rights of the unionized state employees ahead of the bondholders and forces a “haircut” on the people owning those bonds.
Since the Republican Congress is not likely to authorize federal spending on a California bailout, what are the options? Have the Federal Reserve bury another body of dead financial assets in their basement and open a cask of Amontillado?
