Dimon, Buffett sound warning as surprising muni danger-zones emerge

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said he expects more U.S. municipalities to declare bankruptcy and urged caution when investing in the $2.9 trillion public-debt market. “There have been six or seven municipal bankruptcies already,” Dimon, 54, said yesterday at his company's annual health-care conference in San Francisco. “I think unfortunately you will see more.” The JPMorgan boss isn't the only one concerned about municipal bankruptcies. Analyst Meredith Whitney recently sounded the alarm on '60 Minutes," predicting that a number of towns would go bust, putting billions in tax-exempt bonds in jeopardy. Some of the danger zones are already known. Cities including Detroit and Harrisburg, Pennsylvania, have raised the prospect of bankruptcy. The biggest tax-exempt bust last year was a South Carolina toll road with more than $300 million in debt. It could get worse. U.S. states will contend with about $140 billion in deficits in the next fiscal year, the Center on Budget and Policy Priorities, a Washington research group, said in a report issued Dec. 16. State of Disrepair Edmund “Ted” Kelly, CEO of Liberty Mutual Holding Co., said yesterday that his firm had reduced holdings of municipal debt in California and Illinois. Somewhat more surprising, Liberty Mutual has also cut back on debt issued by the state of Connecticut. “The market is being held up to some extent by the belief that the federal government will bail out” state and local issuers, Kelly said in an interview. Vallejo, California, filed for bankruptcy in 2008 after failing to win union pay cuts. Detroit Public Schools, which considered bankruptcy protection last year, said this month the district may try a restructuring to deal with a $327 million deficit. 'Be Very, Very Careful' Tax-exempt municipal-bond yields soared amid a U.S. Treasury selloff and expiration of the federally subsidized Build America Bond program in last year's fourth quarter. The securities lost 4.5 percent in that period, according to the Bank of America Merrill Lynch Municipal Master Index, the worst performance in more than 16 years. “If you are an investor in municipals you should be very, very careful,” Dimon said at the conference. Companies including Allstate Corp., the largest publicly traded U.S. home and auto insurer, have been reducing holdings of municipal debt. Warren Buffett, whose Berkshire Hathaway Inc. trimmed its investment in municipal debt, predicted last year a “terrible problem” for the bonds. Liberty Mutual had about $13.7 billion in municipal securities as of Sept. 30, or about 20 percent of invested assets, compared with $15.5 billion and 23 percent at the end of 2009, according to company statements. The Sept. 30 total includes just $372 million from the state of Florida and $278 million from the state of California. The company, based in Boston, still has holdings from the three states, Kelly said. California and Illinois are rated A1 by Moody's Investors Service, the lowest among the states and the company's sixth-highest ranking. Connecticut is rated Aa2, Moody's fourth-highest. Contrarian Play Gregory Whiteley, U.S. government portfolio manager at Los Angeles-based investment firm DoubleLine Capital LP, suggested in a report yesterday that investors consider municipal bonds because the risk of bankruptcy is low. “The financial stress of state and local governments has given rise to an unusual investment opportunity,” he wrote. --Bloomberg News--