Amidst the carnage wreaked by the sub-prime mortgage crisis, one of the calmer areas of the financial system has been the $2.6 trillion (2007) Municipal Bond (Munis) market in the US. Most of this debt issued by cities and local governments, are held by individual investors. But now here comes revealing reportsthat the disclosure standards and requirements followed by many of Munis issuers suffers from several deficiencies.
Surveys and reports indicate numerous and increasing detection of lapses and omissions in both annual filings of financial statements and other reports of material changes that are of concern to investors. In 2006, Munis that had raised approximately $350 billion upon issuance were found to be delinquent in disclosure. The enormity of the regulatory problem is highlighted by the fact that there are roughly 54,000 municipal issuers with debt outstanding, and 25,000 of those issue debt about every two years, in comparison with shares of just under 4,000 companies trading on the New York Stock Exchange.
While the historic default rates in Munis is a very low 1.5%, these disclosure deficiencies could show up in times of financial turmoil and credit squeeze, as is the case now. What exacerbates the situation is the fast surfacing problems with urban and transport infrastructure in the US, which has increased the demands on investments in these areas, thereby creating greater demands on municipal tax revenues.
Munis may only be the latest example of the failure of the financial market to regulate itself, and yet another example of the need for stronger financial market regulation. A meltdown in the Munis market would be catastrophic for the real economy, with devastating impact on the local governments.
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