Unintended Consequences at Municipalities

[JEast]

Buffet spoke about the unintended consequences at municipalities at length in the Annual this year with respect to default rates and how they may be much higher than expected going forward. Not exactly with respect to default rates here, but the city of Vallejo in California has possibly set new grounds that others will surely follow if they can. That is voiding Union Contracts under a reorganization plan is is not allowed for private companies.

 

http://www.law.com/jsp/nlj/PubArticleNLJ.jsp?id=1202429121561

 

 

Cheers

[woodstove]

Municipal default risk is my main worry re Berkshire nowadays.  Moral hazard.

As you say, union contracts are not bond obligations.  But the story shows a

more "flexible" attitude towards contracts.

 

Future bond insurance should probably involve only partial coverage, akin

to deductible on P&C policies.  If that impedes the marketing of bonds, ie

higher interest rates must be paid to attract lenders, so be it.  Berkshire

should not absorb all the risk.