It's incredible that people with any common sense would pay for the millions in municipal bonds Goldman Sachs (as lead) is partnering with the city of Detroit to pay for its over quarter of a billion in debt.
The debt of Detroit at this time is rated below investment grade, and better municipal bonds than that have failed recently, with more sure to come. Many financial advisers are recommending that people get out of municipal bonds they hold, as they are no longer the safe investments they once were.
I would add they're even worse than that, as the past experience of safety lets down the guard of potential investors who may not understand the change that has happened in the market and the types of projects now being backed by the bonds; for example, many building projects which have been failing. The developers stop paying interest on the bonds and when no one buys the properties, the bonds are sold at huge losses. No interest is paid out as a consequence. You get the idea.
Anyway. For Detroit to seriously offer these bonds is outrageous in itself, but for someone to be gullible enough to buy them is even worse. These will be among the most risky municipal bonds ever offered, and there's nothing in Detroit that is happening to have made that change.
Here's where the Detroit economic story is in a nutshell. Detroit is facing about $300 million in deficits with unemployment approaching 50 percent. They can't even provide police patrols in the city any longer in many areas. Finally, they're looking at demolishing up to 25 percent of the buildings in the city as well.
So now who is going to risk a ton of money for a return they probably will never receive? As I heard one writer say, "this isn't for the faint of heart." And I would add, it's not for anyone with brains either.
Just recently the city has said there is a very real possibility of filing for Chapter 9 bankruptcy protection. And that was based on records from 2008. They are continually behind on reporting, probably to hide the extent of how bad they are, if that's even possible.
Incredibly, the city said the recent offering of municipal bonds attracted far more interest than they expected. Assuming this is true, have people investing in these bonds have that short of memories of the last several years?
The only winner in all of this will be Goldman Sachs and the other banks participating in the bond offering.
The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com
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