SEC member Gallagher defiant on comment

Apr 28, 2013 @ 12:01 am

By Jeff Benjamin

A week after Securities and Exchange Commission member Daniel M. Gallagher was accused by some of exaggerating the looming risks in the municipal bond market with an “Armageddon” reference, he is making no apologies for attempting to raise awareness.

“I made the comment in the context of credit risk plus interest rate risk being two major factors that maybe investors don't fully understand,” he said. “The population of investors in this space means we have to double down on investor education.”

A week ago, at an SEC-sponsored fixed-income round-table discussion, Mr. Gallagher caught some observers off guard when he pointed out that by combining rising rates with the recent California muni bankruptcies, “we've got Armageddon on our hands.”

Although the reference wasn't quite as startling as analyst Meredith Whitney's 2010 prediction of sweeping defaults, it did trigger some comparisons.

“I thought the comments were way too strong, bordering on irresponsible,” said Anthony Valeri, a fixed-income strategist at LPL Financial LLC. “This is along the lines of the Meredith Whitney comments, but it's a different approach because [Mr. Gallagher] is talking about rising rates instead of defaults.”

DUAL RISK

Actually, by referencing the recent California bankruptcies, Mr. Gallagher was touching on both credit risk and rate risk with regard to muni bonds.

But his larger point remains that three-quarters of the $3.7 trillion muni market is made up of individual investors, and it is anybody's guess how those investors will respond if rates start rising.

“Defaults are certainly the more remote scenario — we hope,” Mr. Gallagher said. “I definitely think interest rate risk for investors who will sell before the bonds mature is a big deal.”

jbenjamin@investmentnews.com Twitter: @jeff@benjamin

0
Comments

What do you think?

View comments

Recommended for you

Latest news & opinion

Since banking scandal, Wells Fargo advisers with more than $19.2 billion leave firm

Despite a trying year, the firm has said it will sweeten signing bonuses for veteran advisers.

Is LPL's deal sweet enough for NPH's 3,200 reps and advisers?

They will have to decide if the signing package they are being offered by LPL makes sense. A lot is hanging in the balance.

Eduardo Repetto to leave Dimensional Fund Advisors

Gerald O'Reilly, currently co-CIO, will take over as co-CEO with David Butler.

Alternative strategies boomed after crisis, but haven't been tested

Because the S&P 500 has outperformed, convincing clients they need protection is a hard sell.

7 ways advisers fixed clients' biggest financial dilemmas

Sometimes it takes creativity, along with knowledge and outside help, to get a client out of a jam.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print