What Would Grandpa Say?

Many of you may already know we are not fans of municipal bonds. In fact, we do not hold any municipal bonds in any of our investment portfolios because we think they are too risky. I bet that surprises a lot of people, especially retirees. My astute, well read, late grandfather would be shocked to hear this, having retired from Ma Bell after 42 years, an old school, buy American, blue chip investor. That’s because many advisors routinely recommend that retirees buy and live off of the income generated by supposedly safe individual municipal bonds.

But Warren Buffett, perhaps the most famous investor in the world, may just be having some second thoughts as to how safe municipal bonds really are? The financial press is reporting that Mr. Buffett’s company, Berkshire Hathaway, has decided to significantly reduce its municipal bonds insurance business. They did this by terminating billions of dollars of what the industry calls credit default swaps, otherwise, Berkshire Hathaway may have been on the hook to “pay out” if any of the municipal bonds it insured had defaulted.

On the surface, insuring municipal bonds seems like a great business. Muni’s, you see, are backed by the strength of the issuing state or municipality, and so far this year there has only been six defaults. So why stop insuring municipal bonds? We don’t know for sure and there may be some other business reason why this may be happening, but the first thing that comes to my mind is that, perhaps, Berkshire Hathaway might be thinking municipal bonds are just too risky.

Pick up any newspaper today, or watch any television news program, and you will see that the country is teeming with cities and towns barely able to pay its bills. According to CNN Money, “Since at least 2009 Buffett has warned about the risks of insuring municipal bonds. In his annual letter to shareholders, he said rather than raise taxes to fill budget gaps, government officials might be inclined to default on bonds whose payments are guaranteed by insurance companies. Guaranteeing muni’s against default, he wrote, ‘has the look today of a dangerous business – one with similarities, in fact, to the insuring of natural catastrophes’.” What do you think?

Here’s a link to a 4 1/2 minute video analyzing Mr. Buffet’s decision to stop insuring municipal bonds.

http://finance.yahoo.com/blogs/daily-ticker/buffett-exit-muni-bonds-signals-trouble-ahead-local-165817581.html