The History of Defaults on Municipal Bonds When and Why? Amar Panchmatia BA 543 Spring 2011
Feb 24, 2016
The History of Defaults on Municipal Bonds
When and Why?Amar Panchmatia
BA 543Spring 2011
What Are Municipal Bonds?• Government-Issued Securities
• Cities, Counties, School Districts, Public Utility Districts, etc.
• Tax-Exempt Securities
So Then, What Are Defaults?• When A Debt Obligation Is NOT met
• The Principal Or Interest Payments Are Not Paid When They Are Due
• Federal Government-Issued Securities– Considered Free From Risks Of Default
So Then, What Are Defaults?• Suspension Of Payments
• Issuers Will Continue Or Resume Paying Debt
History Of Defaults• Economic Panic And Depression,
1837 to 1843– Total Indebtedness Of The Default
Issuers > 50% Of Municipal Bonds
• Period After Civil War, 1870s–~25% Of State And Local Indebtedness
Was In Default
History Of Defaults• Economic Depression, Mid-1890s– 10% Of All Municipal Bonds Estimated To
Be In Default
• Great Depression, 1930s– Estimated Less Than 2% Principal And
Interest Past Due In Any One Year
History Of Defaults• Great Depression, 1930s– However, 10% Of Municipal Had Been
Affected By Defaults– By 1933, Actual Accumulated Past Due
Interest And Principal Peaked At 16%
When Do Defaults Come Into Play?
• High Growth Areas
• Periods Of “Heavy Borrowing”
When Do Defaults Come Into Play?
• Periods Following A Downswing In The Economy
Whorehouse Bonds• Involving Governor Of The State Of
South Carolina in the 1870s, Robert K. Scott
Whorehouse Bonds• State Was Supposed To Have Issued $1.2
Million In Bonds
• Instead Offered $22 Million
• Some Bonds Refunded At 50% Face Value
• Others Repudiated
Baby Bonds• Involved The Treasurer For The State
Of Louisiana In The 1880s Post-Reconstruction
Those Who Don’t Learn From History…
• Orange County, 1994
• County Treasurer Bob Citron
…Are Condemned To Repeat It?• Pippa Malmgren
, President And Founder Of Canonbury Group