You may be crazy to invest in debt of corporations and municipalities. Remember when GM went broke? There was little respect for senior bondholders who were raped in favor of the unions. Their secured investments are supposed to get first crack at the assets. One bondholder, a teacher, invested $70,000 in GM bonds and ended up with 140 shares of stock, currently valued at $5,600.
Now we are seeing the same thing happen again in Detroit. Municipal bondholders are finding out that General Obligation (GO) means nothing. Detroit “…proposed a deal last week that included skipping a $39.7 million payment on pension-obligation debt.” A GO municipal bond is backed by the credit and “taxing power” of the issuing jurisdiction rather than the revenue from a given project. Investors consider GO bonds the highest quality and safest and expect the bonds to be an obligation on all the property with the district.
It appears that when the going gets tough in cities, property rights and the rule of law gets thrown out. Good to remember.
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