Stockton Syndrome

Yahoo Finance's Daily Ticker show spoke of the latest ruling by a federal judge allowing the city of Stockton to proceed under bankruptcy protection.

A federal judge earlier this week gave the green light to Stockton, Calif. to restructure under bankruptcy protection despite protests from creditors. The Wall Street Journal reports the judge signaled that Stockton may have to cut payments to its pension fund, which could set a precedent for other cities. The fight also has pitted California’s pension system, CalPERs, against other bondholders and the Wall Street firms that insure them.

“This really hasn’t happened before,” Matt Fabian, managing director of the Massachusetts-based Municipal Market Advisors, tells The Daily Ticker. “We are further along the road toward some potential haircut for bondholders. In all the bankruptcies that have happened in modern history, there haven’t been any haircuts for regular government bondholders – in general people have always gotten their principal back.”

In muni investing, sounds like one should be shifting to essential service revenue bonds from general obligation bonds. Personally, I have always had a bias against government or quasi-government type of bonds whether it is issued by a country, a city or an Indian reservation. The analysis of such bonds invariably involves accessing the will to pay in times of distress by the leaders of such entities as it is impossible to repossess a city or a country. In contrast, mortgage bonds or corporate bonds are much more dependent on underlying asset value. I find it much easier to access asset value than will power.