A Landmark Event You MUST Not Miss

If anyone tries to persuade you that the massive financial crisis striking cities and states is “no big deal,” tell them to take a hike.

It’s here. It’s big. And it’s bound to impact you no matter what you invest in.

This crisis is not a flash in the pan! It’s the culmination of many years of financial abuse.

Indeed, years ago, whenever my father and I talked about muni bonds, we were always deeply suspect of two fundamental flaws at the very heart of this market:

• Bond default insurance — the cockamamie idea that a simple insurance company could truly protect investors from mass defaults, and …
• Blanket tax-exempt borrowing authority — the free reign Washington has given to 50 states and tens of thousands of cities to borrow money for virtually anything under the sun — all with tax exemption.

Our primary concern: In any boom-bust scenario, the consequences for investors could be devastating; the impact on residents, even worse.

Now, those two fundamental flaws are coming home to roost:

• Bond default insurance is toast. Two of the largest bond insurers — Ambac and FGIC — are already bankrupt, with FGIC now subject to outright liquidation by New York State regulators. And MBIA Inc., the only surviving bond insurer among the Big Three, has just been downgraded by three notches to B- — deep into junk territory.

So hundreds of thousands of investors who bought insured bonds are now vulnerable. Investors thought they were buying protection against default. Instead, they got little more than a pig in the poke.

• Blanket tax-exempt borrowing authority has backfired. Cities, counties, and states have spent and borrowed so much in recent years — and are now in such bad shape financially — they literally have blood on their hands.

To truly comprehend what I’m talking about, watch this 2-minute NBC Nightly News segment, titled “Mean Streets.”

It’s not only about last week’s 50 percent reduction of the police force in Camden, New Jersey, but also about the dire implications for residents of virtually any U.S. city.

Indeed, Camden isn’t alone. NBC reports that the sinking economy has forced police cutbacks in:

• Oakland, California, which eliminated about 10 percent of its force …
• Flint, Michigan, which laid off about one-third of its officers …
• Newark, New Jersey, which has seen the biggest police cutbacks in 32 years, plus …
• Hundreds of cities across the country.

“God forbid something terrible happens!” said the head of the police union on Saturday. “The blood is on everyone’s hands.”

Unfortunately, something terrible did happen: Twenty-year-old Anjanea Williams became the first homicide victim after the city laid off nearly half its police officers. She was shot dead waiting for her lunch order outside a deli in South Camden. Of course, nobody can say for sure if the layoffs caused her death. But nobody’s denying it’s a very strong possibility.

A Philadelphia reporter responded with venom and gloom:

“The Mayor and all responsible parties,” he writes, “should be thrown out of office and charged with criminal negligence. The thugs in Camden were so brazen that they actually printed up t-shirts marking the day when the police layoffs would begin. Brace yourselves, people — Camden is about to get ugly, really ugly. New Jersey could have another Detroit on its hands.”

I’m not predicting the crime rate will soar all across America. But for investors, the message could not be clearer:

As the dire consequences of painful budget cuts become more widespread, and as the public outcry grows, local politicians are going to be increasingly reluctant to make deeper cuts — and far more willing to stiff their creditors, including bond investors.

Wall Street Pundits in Deep Denial
(Or Lying Through Their Teeth!)

Just a few days ago, Wall Street’s talking heads jumped on the air waves in a concerted effort to pooh-pooh the crisis with a series of denials. But already, the real-world facts have proven them dead wrong, with potentially devastating consequences for investors.

Wall Street Denial #1. “Tax-exempt bonds are safe,” said one analyst last week. “Even when a city goes bankrupt, creditors get most of their money back.”

The real world: The very next day, Vallejo, California, the second municipal bankruptcy in the state’s history, proposed a bankruptcy exit plan in which many creditors would get only 20 cents on the dollar. And those were the “lucky” ones! Some would wind up with just 5 cents on the dollar.

Consequences for investors: There are 55,000 different tax-exempt bond issuers in the U.S., most of them cities and towns. And many of them seem to like the idea of bankruptcy.

They figure the Vallejo “model” — a Chapter 9 filing that allows them to pay creditors only pennies on the dollar — can save them a fortune. And they hope it will help them avoid the most painful, gut-wrenching cutbacks of police forces and emergency staff.

So they’re thinking more seriously about following Vallejo into bankruptcy. If they proceed, many tax-free investment portfolios could turn to dust.

Wall Street Denial #2. “Yes, cities can file for Chapter 9,” admitted one prominent muni bond expert. “But by law,” he said with a great air of authority, “states can never go bankrupt!”

The real world: Just two days later, the New York Times broke the bombshell news that Capitol Hill lawmakers of both parties are seriously considering changing the law — to allow states to file for Chapter 9 bankruptcy, just like cities. Prominent leaders at both the state and federal level simply see no other way out!

Consequences for investors: Investors in state bonds could wind up at the back of the same line as unsecured creditors, says the Times.

Wall Street Denial #3. Meredith Whitney, who predicted up to 100 muni bond defaults this year, is “radical” and “absurd” declared a parade of industry specialists. They based their criticism of her work largely on the high S&P, Moody’s, and Fitch ratings still boasted by most issuers.

The real world: S&P, Moody’s, and Fitch collect huge fees from virtually all the bond issuers they rate.

That’s why they unanimously gave stellar grades to giant financial institutions that subsequently failed — Bear Sterns, Lehman Brothers, Wachovia Bank, and many others.

That’s also why Congress has finally agreed with our Congressional testimony of two decades ago — that those ratings are seriously conflicted. And that’s why we feel the ratings of tax-exempt bond issuers are equally suspect.

Here are two telltale examples:

California recently reneged on its payments to unsecured creditors — it paid them off with scrip that was worth only about 80 cents on the dollar. But despite that de-facto default, Moody’s still gives California its A1 rating, SIX full notches above junk. In fact, according to Moody’s, A1 denotes obligations subject to “low credit risk” — not exactly consistent with what we already know about California. Meanwhile …

In Illinois, the state’s de-facto default is even more serious — it has stiffed creditors for payments for up to six months. And still, Moody’s gives it the same A1 rating it gives to California.

Consequences for investors: Shock! When cities and states default, investors will get little or no advance warning. You simply cannot count on traditional industry analysts and rating agencies to warn you of impending defaults. With rare exceptions, their primary agenda is to protect the bond issuers — their clients — even if that means hiding the facts from investors like you.

Wall Street Denial #4. “Only a very tiny percentage of tax-free bond issuers have actually gone bankrupt in recent years,” say the pundits reassuringly. “So don’t worry.”

The real world: Past performance of cities and states, especially during a period of rapidly rising property tax revenues, is no indication of future results. Quite the contrary, now that the tax revenue bubble has collapsed, the historical data they’re citing is entirely irrelevant.

Consequences for investors: The failure rate on tax-exempt bonds could surge ten-fold, twenty-fold, or even a hundred-fold or more — just as it did on prime mortgages and on commercial banks in recent years.

How a Default by a State or Major
City Can Impact You in Many Ways

First, if you own tax-free bonds of any kind — whether revenue bonds or general obligation bonds, whether high rated or low rated — you will most likely see an immediate decline in their value. Indeed, a decline is already under way right now, and it’s bound to accelerate dramatically in the wake of a major default.

Second, if tax-exempt bonds are among the holdings of your mutual fund, money market fund, ETF, or pension fund, the value of your investments will be negatively affected.

Third, banks and insurance companies: Fortunately, most do not invest heavily in municipal bonds. Banks hold only $229 billion in municipal securities and loans, while insurers hold only $448 billion, according to the Fed’s latest tally.

But some banks and insurers do invest more heavily in this sector; and if yours is among them, the safety of your savings or insurance could be reduced by defaults. Moreover, nearly all financial institutions are adversely impacted when troubles in any sector of the bond market cause a general rise in interest rates.

Fourth, if you do business in the state or city that’s defaulting, your revenues can be reduced due to a nosedive in the local economy and, worse, due to payment failures by the government or its contractors.

Fifth, the most challenging impacts are those that extend beyond business and investments — to your family’s security and well-being. As you’ve seen, if you or your loved ones reside in a state or city in trouble …

• Your local police, fire, and other emergency services could be disrupted.
• Medicare and other critical programs could cease to function.
• And in the worst-case scenario — which we pray will RARELY occur — you could see the kind of civil unrest we’ve already seen in Greece, Ireland, and elsewhere.

All this is why my team and I are hosting America’s Day of Reckoning this coming Wednesday:

Right off the bat at this timely briefing, we’ll name the 11 states most vulnerable to financial disaster, PLUS the 26 large tax-exempt bond issuers most likely to default this year.

Then, we’ll answer the most critical questions our readers asked us all last week on my personal blog …

• “How can the current stock market rally last with all the cities on the brink of bankruptcy? What are your projections?” — Richard K.
• “In light of all these negative comments, how will gold perform in 2011?” — Burton R.
• “What about silver? What can we do with silver?” — Tim S.
• “For those with significant money in retirement accounts, what can be done?” — FBL
• “What will happen to the real estate you own if the financial sector crashes?” — Steve

Plus, we’ll also NAME the specific investments we’re counting on to not only PROTECT your wealth, but also to MULTIPLY IT as this crisis unfolds!

We’re holding the event at noon Eastern, Wednesday, January 26. That’s the day after tomorrow. So the final registration deadline is TOMORROW.

Good luck and God bless!

Martin