Wall Street Journal: Backstop Sought for Muni Arena

One of my 13 Outlier Predictions for 2009

We've made very clearly for a year and a half now that state budgets would be a complete disaster in the coming year. With a cloudy crystal ball considering what Obama will do in terms of individual state stimulus it is hard to make a call here; frankly aside from Orange County in the early 90s a municipal default was as rare as a dodo bird. But without federal government aid, we will see the threat of a bevy of them. If there was no federal government bailout this would be my call but as with all things - the level of government intervention makes predictions difficult.

Instead, we'll say as it becomes increasingly clear that states and local government agencies have to pay higher fees on bonds to offset their growing risks - a situation they can ill afford, the Federal Reserve will add municipal bonds to their growing litany of backstops adding to the $8 trillion already "guaranteed". Since the market believes the Federal Reserve can backstop everything in the entire nation; this will reduce borrowing costs for said local entities.

That didn't take long! I cannot get to the full article, but I am sure if I did I'd puke...

• The incoming Obama administration is proposing a coordinated effort by the Federal Reserve and the Treasury Department to provide a funding backstop for the $2.7 trillion municipal-bond market. The market, in which all issuers but the most creditworthy have had difficulty accessing funds, has been clamoring for such a move.
• The plan calls for the Fed and the Treasury to design a facility similar to the program set up for the commercial-paper market that has helped ease financing conditions for companies in need of short-term funds.

We are simply pathetic. Just add it to the tab - what's $2.7 Trillion more of backstops when we already are at $8.5 Trillion [Nov 26: Bloomberg: U.S. Government Now on Hook for $8+ Trillion] Our entire economy generates $13 Trillion - so we now will backstop as much as we produce. But you can do that when you can print money from here to infinity. Yee haw.

We are headed to the United States of NonRisk. Well.... no risk to market participants - all the risk will be going onto the government/Federal Reserve balance sheets. (read: you, the taxpayer) Everything is now subsidized by the nanny state - enjoy. And it's time to buy municipal bond closed end funds! Whee!

Looks like "those in the know" knew about this before us - that never happens on Wall Street...even playing field and all - right Government Sachs? PIMCO? Just a random walk down Wall Street *cough*

This is now a market where if you know the people who are sitting in on meetings with the Treasury, Federal Reserve, and the Administration - you make money hand over fist. Meaning, the little guy has no chance at the "easy pickings"; looking at these charts I'd say the first part of the move from December was due to the Fed saying they will buy anything in the world to support the system and then the first meetings to talk about backstopping munis happened about 4-5 days ago. But that's just me being a cynic - I am sure this was "happenstance".