The History of Defaults on Municipal Bonds

When and Why?Amar Panchmatia

BA 543Spring 2011

What Are Municipal Bonds?• Government-Issued Securities

• Cities, Counties, School Districts, Public Utility Districts, etc.

• Tax-Exempt Securities

So Then, What Are Defaults?• When A Debt Obligation Is NOT met

• The Principal Or Interest Payments Are Not Paid When They Are Due

• Federal Government-Issued Securities– Considered Free From Risks Of Default

So Then, What Are Defaults?• Suspension Of Payments

• Issuers Will Continue Or Resume Paying Debt

History Of Defaults• Economic Panic And Depression,

1837 to 1843– Total Indebtedness Of The Default

Issuers > 50% Of Municipal Bonds

• Period After Civil War, 1870s–~25% Of State And Local Indebtedness

Was In Default

History Of Defaults• Economic Depression, Mid-1890s– 10% Of All Municipal Bonds Estimated To

Be In Default

• Great Depression, 1930s– Estimated Less Than 2% Principal And

Interest Past Due In Any One Year

History Of Defaults• Great Depression, 1930s– However, 10% Of Municipal Had Been

Affected By Defaults– By 1933, Actual Accumulated Past Due

Interest And Principal Peaked At 16%

When Do Defaults Come Into Play?

• High Growth Areas

• Periods Of “Heavy Borrowing”

When Do Defaults Come Into Play?

• Periods Following A Downswing In The Economy

Whorehouse Bonds• Involving Governor Of The State Of

South Carolina in the 1870s, Robert K. Scott

Whorehouse Bonds• State Was Supposed To Have Issued $1.2

Million In Bonds

• Instead Offered $22 Million

• Some Bonds Refunded At 50% Face Value

• Others Repudiated

Baby Bonds• Involved The Treasurer For The State

Of Louisiana In The 1880s Post-Reconstruction

Those Who Don’t Learn From History…

• Orange County, 1994

• County Treasurer Bob Citron

…Are Condemned To Repeat It?• Pippa Malmgren

, President And Founder Of Canonbury Group