There’s a short WSJ article entitled Credit Crunch Provides Opening In Muni Bonds about yields rising (prices dropping) on muni bonds.  What are the reasons for the price shift?

The first is that investors have been selling anything not issued directly by the federal government — irrespective of the issuer’s credit-worthiness. That has included an aversion to debt issued by state and local governments.

Second, the municipal-bond market has been rattled by concerns about the financial health of companies that insure bond issuers against defaulting on their interest payments.

These insurers also guaranteed bonds backed by low-quality mortgages and are under pressure to back up those guarantees or face ratings downgrades.

That last paragraph about the private bond insurers not being strong enough to repay on default echoes David Einhorn’s take on municipal bond (under)ratings and bond insurance:

The misrating of municipal bonds directly benefits the friends of the ratings agencies on Wall Street, the banks who underwrite the deals.  A lower rating - means bigger underwriting fees.  Or alternatively, the excess cost can be shared with another great friend - I mean very large customer - of the rating agencies - the municipal bond insurers who effectively rebate some of the “overcharge” to the municipalities in exchange for a share of the savings through a scheme called “bond insurance.”  The municipalities purchase bond insurance to enhance their credits to AAA level.  Of course, since they are in fact, AAA to begin with, the insurance provides no true benefit.

I assure you that a quick peak at the balance sheets of any of these so-called AAA rated bond insurers will tell you that they are not likely to be there to pay more than a fraction of the claims they have insured in an environment where there are wide-scale defaults in the municipal bond sector.

So, what to do? Do you invest in munis even though you realize that the bond insurance is junk …. because you also know that the bond insurance wasn’t originally needed anyway … since the munis were underrated by the agencies? 

The big question is will they actually default?  The Journal reiterates the view of Einhorn, noting “that just 0.1% [of investment grade muni bonds] failed to make good on interest payments — a far lower rate than on corporate bonds.”  From my joe-citizen perspective, I’d also agree that default seems unlikely.  Municipalities probably won’t become fiscally sustainable anytime soon  … but, like most Americans, municipalities should be resourceful enough to find money to pay off their ever-mounting interest (at least for awhile).  Municipalities can raise taxes, sell off the local park, sell rights to run government services as legalized monopolies, or just ask the state/federal government for a bailout.  And that last option just means printing money, so I’d expect inflation before any of these municipalities really default.

But still, playing the markets is all about the timing your investments: if when the bond insurers get more bad press from their financial instability, muni bond prices could will drop even further and be an even better deal.  So all you have to do is time the market. Easy.

I’m certainly no financial whiz, but I never knew-until-today that municipal bonds, corporate bonds, and other financial instruments are rated on scales relative to their type rather than one all-encompassing scale.   e.g. “An A rated muni has the same chance of default as AA/AA- rated corporate and a AA+ rated CDO.” (quote from David Einhorn’s 10-19-2007 prepared remaks.)

I suppose it’s not that surprising that these things are rated on different scales given their different underlying variables (default, recovery rates, etc).  I just didn’t realize it happened.  I thought an A was an A.

Einhorn makes this difference especially noteworthy when he writes: “Moody’s noted the 10-year cumulative default rate for all investment grade Moody’s-rated municipal bonds, including bonds one notch above junk, is about half the rate for Aaa rated corporate bonds.”  Next time I look at Munis, I’ll give them a little more credit. (pun intended)

Regarding the rest of Einhorn’s paper: I agree with Einhorn’s criticisms of the ratings-hegemony held by the major agencies because of their exclusion from Reg FD (they get privileged information from the investments they’re being paid to rate without having to disclose it like everyone else).  Doesn’t seem like the current system is built to produce the most accurate ratings.

Sometimes (and lately more often), I look at America and think: “If this were happening in another country, we’d be outraged.”

(p.s. thanks to JCHP for passing along the paper.)

So I finally watched Inconvenient Truth.   I have avoided the Global Warming issue for awhile so I’ll be upfront that I haven’t read much and haven’t consulted enough sources.  But here are some knee-jerk thoughts:

1. I’m glad I watched it and wish I had sooner.  I haven’t quite been “Gored“; I am too skeptical a person to completely believe any politician … but the movie certainly encouraged me to learn more.  Further — even without considering global warming — humanity certainly does affect its natural surroundings in many ways, and the movie is a good starting point for discussing how humanity should handle its interactions with the world.  I most agree with the ole’ boy scout adage “leave no trace“, but what is humanity to do if the natural ecosystem “turns” on us? For example, what if we were heading into a natural ice-age …  should we create global warming to stop earth’s regular pattern?  Lots of species would die … but who are we to mess with Mother Nature?  Seems like we view the present as the way it always was and always should be … but change happens.  Do we let it?  Who decides?

2. The morning after I watched the film, there was an editorial in the WSJ entitled “Global Warming, Inc.” that discussed Al Gore’s appointment as a partner at the prestigious Kleiner Perkins venture capital firm.  The editorial finds the appointment a convenient time to bash on subsidies from the government to alternative fuels that are not actually price competitive in the market.   I don’t doubt Kleiner is motivated to bring Gore on board so that Gore can get the government to fund alt-energy … (I also don’t doubt they brought him on to rally consumers around their investment’s alt-energy products) …  and that’s generally just profit-drivin motive, which is fine.  My one complaint with the Gore appointment and subsequent subsidies is simply that the government provides subsidies at all to make uneconomical energies competitive rather than appropriately tax the externalities of dirtier fuels. 

[I’m no economist, but my quick take on subsidies: with subsidies, taxpayers pay for the subsidies AND indirectly experience the cost of the harmful externalities.  If we tax the externalities, we pay more for the taxed product, but it is an overall lower amount since we wouldn’t have the externality AND the subsidy.  As an example: let’s say oil costs $10 and the externality-cost (air-quality effects, CO2 emissions into atmosphere) is an additional $10, while solar power costs $15 and has $0 externality costs.  Without a subsidy, everyone buys $10 oil b/c they don’t care about the externalities.  The total consumer cost, though, is $20 since they pay the $10 oil cost plus the indirect-costs of the $10 externalities. With an equalizing subsidy of $5 (the government gives $5 to the solar companies from general consumer taxes),  solar now costs $10 and oil costs $10, so people buy 50% oil and 50% solar.  Their total cost would be 50% * ($10 oil cost + $10 externality-borne-by-consumers) + 50% * ($15 solar cost + $5 tax-subsidy-paid-for-by-consumers) = $20.  So we’re really no better off with a subsidy.  Yet … if the government taxed the oil companies $10 to account for the externality (so the consumer cost of oil is now the real $20), the consumer would only buy $15 solar rather than $20 oil, and the total cost would be $15.  Oh … and what if the government charged a $6 subsidy so that people were compelled to only used the “$9″ solar power?  We wouldn’t have any externalities, but we’d also be paying $21 for solar.  Of course, figuring out what an externality costs is another matter … but at least the most-efficient solution is a possibility … ]

3.  Gore said that we need the ‘political will’ to fix global warming.  He also said (paraphrasing) that people need to care about the issue.  I agree much more strongly with the latter since it’s necessary before the former will matter.  And although Gore spent most of the movie on-topic, I felt the movie too often annoyingly diverted into Gore’s life and political efforts.  I came into the movie expecting charts and graphs and was actually a little disappointed that there weren’t more.  I wanted more data, less boo-hoo about the 2000 presidential election.  If he’s trying to get a favorable opinion from the watcher, he should make me care about the issue first; I’ll care about the messenger afterwards.

4. I thought it was interesting that Gore didn’t explicitly credit Simpsons creator Matt Groening for the little animated featurette about global warming near the beginning of the film (and here’s another related Groening created trailer/commercial).  The only explanation I can come up with is that anyone who would recognize the animation style (teens- to middle-aged) wouldn’t need the hint, and anyone that wouldn’t recognize the animation style (seniors) would probably have an unfavorable opinion of the The Simpsons anyway, so no need associate Gore with it.   If that sort of thought went into editing out a Groening reference … that’s slimy.  If you don’t think a constituency likes The Simpsons and you do … you alienate both in the long-term by trying to cater to both deceptively.  (sorry in advance if I missed Gore giving Groening credit in the movie!)

5. Somewhat related to the image issue above, I also got tired of all the ’subtle’ stuff put into the movie to ’show’ a trait of Gore.  Seemed like Gore was toting/working-on his Powerbook just about every time he wasn’t presenting … they should have just had a subtitle that said: “Gore made the entire presentation himself using the hippest Apple technology!”  (It’s not that I don’t like macs … the product placement was just over-the-top.)  Another subtitle suggestion: “Gore is a just a regular guy like you!” should be flashed when the movie — for no good reason — showed Gore going though airport security, boarding a commercial passenger plane, and then getting out of an NYC taxi.  My god, was he even born out of a womb like you and me?  Even if its all true — if he slaved over every pixel of every slide in his presentation — it was just too much, and too off-target (see #3).  Lest you think I’m anti-Gore … I’m not: I’m just anti-fake.  I get annoyed with just about anything that’s scripted-to-look-unscripted, tries-to-be-subtle-and-fails, or appeals-to-emotions-rather-than-reason-when-the-issue-is-rational.  In logos/ethos/pathos terminology: establish ethos, sway me with logos, don’t try pathos (or do at your own risk).

6. Watching Inconvienent Truth just as I was finishing re-reading Ayn Rand’s Atlas Shrugged was an interesting experience.  (You can probably see the influence at the end of the paragraph above…)  I’m still sorting it out.

7. I checked out climatecrisis.net, the homepage for the movie, and was appalled by the horrible-ness of “The Science” page there.  Where are are the links to the hundreds of journal articles that support the statement at the top of the page saying “the evidence is overwhelming and undeniable.”  The facts on that page are ’shockers’: they sound Big and Dangerous but there’s few reference points for comparison data or long-time-span historical relevance.  Is this “the science” needed to convince average Americans these days?  I hope not.

11/30/07 update: I fixed several grammatical mistakes and misspellings.  I should write posts in Word and copy/paste to the blog rather than trying to write posts directly in Wordpress. Still learning.