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Kaminsky's Call: Muni Bond Crisis is Overblown

Wednesday, 13 Oct 2010 | 9:34 AM ET

If you go by some recent notable analysts' reports, we are headed for a municipal bond crisis to rival the financials' collapse of 2008.

State hearing room
State hearing room

This doomsday prognosis is simply overblown, and here's why.

We have been focused on muni's since The Strategy Sessionlaunched in June, and with good reason. Given the under-funded pension liabilities as well as challenges in revenue collection, the ramifications for the capital markets are prevalent.

But while the space is not in the greatest shape, the bonds have government backing that serves as built-in protection.

As a guest on yesterday's show, Alexandra Lebenthalpointed out that within every state, the numerous issuers of general obligation bonds are backed by taxing power. Revenue bonds find support in a specific stream. Either way, the President and CEO of Lebenthal & Co. staked her claim that bankruptcy is likely not going to materialize. Even if it did, the way muni's operate, the states still have to pay their debt.

Muni Meltdown
Municipal pensions face a $500 billion deficit, and states are already $3 trillion in the hole, according to a new report. Benjamin Thompson, of Samson Capital; Alexandra Lebenthal, of Lebenthal & Co.; and "The Strategy Session" hosts discuss.

We also had Ben Thompson, Founding Principal of Samson Capital Advisors, call in with his opinions. Managing $7 billion in muni's, he echoed Lebenthal's argument that states cannot default. At the state and government level, he contended, there are multiple resources of power that cannot be underestimated. He also added that since most municipal yields are above those of treasuries right now, the municipal market is one to watch, not avoid.

Lebenthal additionally remarked off-screen that the wonderful thing about municipal bonds is that when they're issued, the economy is boosted and jobs are created. When one thinks of the positively of this dynamic, it's more distressing when analysts predict a full-on crisis.

But I am going on the record against these predictors of disaster not just for my hopes for the country's prosperity, but also for my realism. When the financial crisis happened in 2008, the government stepped in to relieve some, but left others to dry. This cannot happen when the obligation is already backed by the government.

Yes, "Too Big to Fail," was tested two years ago, but this is a different scenario with different structure. Some high-profile analysts need to realize that.

Programming note: "The Strategy Session," hosted by David Faber and Gary Kaminsky, airs weekdays at Noon ET on CNBC.

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Gary Kaminsky does not hold any equity positions.

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