Over the past couple of weeks I can't go twenty minutes without seeing a warning about municipal bonds.
So imagine my surprise to see the guru of bond gurus Bill Gross buying muni bond funds with his personal cash.
Earlier this month Gross spent $4.4 million of his own money this month to purchase shares of five municipal-bond funds run by his firm after tax-exempt debt tumbled.
This more than doubled his holdings of the firm’s closed- end municipal bond funds, according to Securities and Exchange Commission data. He bought about 451,000 shares of Pimco municipal bond funds in December, bringing his total holdings to about 878,000 shares.
Today Gross was interviewed by CNBC on these investments.
His basic position is that:
- The high yields are attractive on a risk/reward basis
- He agrees that State and Muncipal finances are similar to what is facing Europe
- He doesn't believe a state would ever default
- He thinks Illinois should be avoided as only 50% of their budget is funded through revenues
- Believe Uncle Sam will always stand behind the states
Here is he video of the inteview:
[url=http://www.cnbc.com/id/15840232?video=1713800375&play=1]http://www.cnbc.com/id/15840232?video=1713800375&play=1[/url]
The comptroller of Illinois agrees with Gross about his state. Here is what he had to say to 60 minutes:
"And nowhere has the reckoning been as bad as it is in Illinois, a state that spends twice much as it collects in taxes and is unable to pay its bills.
"This is the state of affairs in Illinois. Is not pretty," Illinois state Comptroller Dan Hynes told Kroft.
Hynes is the state's paymaster. He currently has about $5 billion in outstanding bills in his office and not enough money in the state's coffers to pay them. He says they're six months behind.
"How many people do you have clamoring for money?" Kroft asked.
"It's fair to say that there are tens of thousands if not hundreds of thousands of people waiting to be paid by the state," Hynes said.
Asked how these people are getting by considering they're not getting paid by the state, Hynes said, "Well, that's the tragedy. People borrow money. They borrow in order to get by until the state pays them."
"They're subsidizing the state. They're giving the state a float," Kroft remarked.
"Exactly," Hynes agreed.
"And who do you owe that money to?" Kroft asked.
"Pretty much anybody who has any interaction with state government, we owe money to," Hynes said.
That would include everyone from the University of Illinois, which is owed $400 million, to small businessmen like Mayur Shah, who owns a pharmacy in Chicago and has been waiting months for $200,000 in Medicaid payments. Then there are the 2,000 not-for-profit organizations that are owed a billion dollars by the state.
Lutheran Social Services of Illinois has been around since 1867 and provides critical services to 70,000 people, mostly the elderly, the disabled, and the mentally ill. The state owed them $9 million just before Thanksgiving, and they nearly had to close up shop.
Asked how long his organization can go on like this, Rev. Denver Bitner, the president of Lutheran Social Services of Illinois, told Kroft, "Well, we wonder that too because we really don't know."
He says they were forced to tap their entire line of credit and all their cash reserves before the state would finally pay them as a hardship case.
"It has to be that you've sold off all your assets, you have borrowed from everybody that you can borrow from, and then, we'll think about it," Rev. Bitner explained.
And according to Bitner, that's even though the state owes his organization the money.
"The first words out of my mouth are usually an apology, because they have been you know put in this situation, that is really unacceptable. And you know there is very little I can do or say other than apologize," Comptroller Dan Hynes said.
It's not just the social safety net that Hynes has to worry about: there have been Illinois legislators that have been evicted from their offices because the state didn't pay their rent, and stories about state troopers being turned away from gas stations because the owners refused to take their state credit cards.
"The state's a deadbeat," Kroft remarked.
"Yeah. I mean, the state of Illinois is known as a deadbeat state. This is a reputation that has taken us years to earn and we've reached, you know, the heights of, I think, becoming the worst in the country," Hynes said."
It is always interesting to see someone considered an expert doing the opposite of what the general market perception is telling you. I think it is well beyond my circle to be able to evaluate the finances of various government bodies, but perhaps I can learn something by watching.
