The next financial meltdown will probably come in the municipal bond market, says Rick Bookstaber, a senior adviser to the Securities & Exchange Commission.
In a personal blog, he lists six reasons why the muni market poses the biggest financial threat.
• The market is leveraged and opaque.
• It’s very big and tied to the credit markets.
• It’s viewed by investors as being diversified by holding a geographically broad-based portfolio.
• It’s a market with huge portfolios where assets and liabilities are apparently matched.
• It’s a market with questionable analysis by rating agencies
• It’s a market with entities that may not approach default with business-like dispatch and that have already mortgaged sources of revenue that are thought to support their liabilities.
“Once a few municipalities default, there is a risk of a widespread cascade in defaults,” Bookstaber says.
“(That’s) because the opprobrium will be lessened, all the more so if the defaults are spurred along by a taxpayer revolt — democracy at work.”
The muni market has been rising as of late, with the Merrill Lynch long-term municipal bond index up 2 percent so far this year.
But many see a crash on the horizon.
“I think we’re getting quite close,” Michael Aronstein, manager of the MarketField Fund told Bloomberg.
“You’ll see people trying to withdraw money from the municipal bond funds. The big risk comes when you start seeing the tightening credit cycle.”
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