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The History of Defaults on Municipal Bonds

The History of Defaults on Municipal Bonds. When and Why? Amar Panchmatia BA 543 Spring 2011. What Are Municipal Bonds?. Government-Issued Securities Cities, Counties, School Districts, Public Utility Districts, etc. Tax-Exempt Securities. So Then, What Are Defaults?.

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The History of Defaults on Municipal Bonds

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  1. The History of Defaults on Municipal Bonds When and Why? Amar Panchmatia BA 543 Spring 2011

  2. What Are Municipal Bonds? • Government-Issued Securities • Cities, Counties, School Districts, Public Utility Districts, etc. • Tax-Exempt Securities

  3. 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

  4. So Then, What Are Defaults? • Suspension Of Payments • Issuers Will Continue Or Resume Paying Debt

  5. 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

  6. 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

  7. 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%

  8. When Do Defaults Come Into Play? • High Growth Areas • Periods Of “Heavy Borrowing”

  9. When Do Defaults Come Into Play? • Periods Following A Downswing In The Economy

  10. Whorehouse Bonds • Involving Governor Of The State Of South Carolina in the 1870s, Robert K. Scott

  11. 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

  12. Baby Bonds • Involved The Treasurer For The State Of LouisianaIn The 1880s Post-Reconstruction

  13. Those Who Don’t Learn From History… • Orange County, 1994 • County Treasurer Bob Citron

  14. …Are Condemned To Repeat It? • PippaMalmgren, President And Founder Of Canonbury Group

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