The Missing Warning Label

Zero Hedge pointed out this ad for California state bonds:



In light of the recent Stockton bankruptcy, this should carry a warning label:  "California reserves the right to repudiate up to 100% of these bonds whenever payment of the interest or principle interferes with paying state employees the maximum possible pension benefits.  These bonds are subordinated to any promises made at any time by any politician to state employees unions, past, present, or future."


  1. Matthew Slyfield:

    Unless the CA government or the Obama administration illegally intervenes in the bankruptcy proceedings, bankruptcy will put the bond holders in front of the Stockton union employees. So the Stockton bankruptcy has nothing to do with a need for the above warning label.

    Every government bond from municipals to US Treasury bonds should come with a warning label that says "Warning your ability to collect on this bond when due is contingent upon you finding another sucker to buy enough bonds to pay off yours."

  2. herdgadfly:

    Standard bankruptcy puts bondholders ahead of union pensions, but then there is the GM-Chrysler ruling. CALpers arrogantly declares that California laws protect pensions, but facts are that the Federal bankruptcy referee can void any and all contracts, including pensions.

  3. Matthew Slyfield:

    The GM-Chrysler bankruptcy results were the result of the executive branch illegally intervening in the proceedings. In any case I doubt they have any precedencial value.

  4. rowbigred26:

    The bankruptcy of Stockton is as unprecedented as the GM-Chrysler bankruptcy. That's not to say that the precedent set at GM will mean anything, but rather that the executive branch can illegally intervene in a bankruptcy makes the above warning label valid. It has happened and there's nothing to say it can't happen again.

  5. Matthew Slyfield:

    I didn't claim the warning label was invalid, I claimed the Stockton bankruptcy has no impact on the need for a warning label.

    The state of CA is headed to bankruptcy itself and anyone paying attention could see that long before Stockton filed for bankruptcy.

  6. marque2:

    But we have had a balanced budget for the last 3 years now, I believe. :O How can that be?

  7. Matthew Slyfield:

    They lie. Mostly by using accounting tricks that would get executives in private corporations jail time. Things like keeping major expenses and liabilities (like under funded pension plans) off budget.

  8. marque2:

    Yes, I was joking. Newspapers always report triumphantly that the state budget is balanced - because this was part of a Union sponsored initiative which tool away the 2/3 vote on budgets. However every year the budget is 10 billion behind six months later.

  9. marque2:

    I was actually joking. The press loves to tout the balanced budgets because they supported the Union planted initiative, that took away the 2/3rds vote for budget approval, but gave us a balanced budget instead.

    Every year the budget gets certified as balanced, and yet somehow 6 months out the state is 10 billion behind because revenue projections, did not turn out, yet again.

  10. mesaeconoguy:

    There is no state bankruptcy process.

  11. mesaeconoguy:


  12. mesaeconoguy:

    I will repeat this, with more emphasis:

    The bankruptcy of Stockton is as unprecedented as the GM-Chrysler bankruptcy.

    Detroit is in receivership. Most of CA is about to be in receivership.

  13. Craig Limesand:

    This is especially true because California is at the vanguard of putting warning labels on everything. I think every item sold in stores is known to cause cancer in CA.

  14. Joe Mann:

    Even snake oil salesmen are saying, "You're kidding? And you were able to get someone to fall for that?"

  15. marque2:

    Technically our states are all sovereign,though it doesn't seem that way any more. Federal government shouldn't need to have a law, in order for states to default. State should just be able to say - we are defaulted, sorry. The repercussions for that state would be that it would be difficult to borrow money for the next 5 years or so.

    It is interesting, that bankruptcy can enhance credit ratings though. Look at a private individual, with way too much debt. He/she goes bankrupt and most of that debt is discharged - now the debt to income ratio looks pretty good, and the credit rating goes up, so we got lenders willing to lend to you again! Scary stuff.

  16. marque2:

    Why not as a sovereign entity, the state should be able to define it for itself. I know there is no Chapter xx of the Federal bankruptcy code for states, but why should a state need a federal law to bankrupt itself? The state would just stop paying things

    Maybe you are quibbling about terminology - should we call it fluffy bunnies? There goes Illinois through its fluffy bunny process.

  17. mesaeconoguy:

    No, there is no process for states to pass through bankruptcy. No chapter exists for that situation.

    You’re talking about debt repudiation, which is different, and would have different financial downstream effects.

    Bankruptcy is a very specific reorganization process, which is designed to discharge debt and in many cases resume the entity's economic functionality. That would be extremely difficult in CAs case.

    Repudiation is simply not paying your obligations, which financial markets do not like at all.

    I’m looking for a better source, but here’s a little more info –

  18. mesaeconoguy:

    Right, see above, the bankruptcy process is designed to "fix" the debt situation of the debtor.

    Repudiation is just thumbing your nose at creditors, which is a financial no-no.

    That's also why the GM/Chrysler "bailouts" were so destructive.

  19. marque2:

    How does the bankruptcy process do anything different. State will say, we are only going to pay back 25% pensions are going to be reduced, and we are renegotiable our Union contracts.

    'K state is now better off - how is that different from Bankruptcy? Bankruptcy is a process, not just a Federal Law, and if a state can't meet all its debts, it will go through a bankruptcy process - whether you want to call it that or not.

  20. marque2:

    Bull, see my comment above. State does not need Federal Permission or Federal law to go though a Fluffy Bunny process.

    As for the Frum article how stupid - why would a state need a federal law to fix itself? A state is sovereign, it just has to declare there is a need for Fluffy Bunny and then implement it. If parties feel aggrieved by the Fluffy Bunny settlement imposed by the state, they have recourse through that states courts.

    You are now being annoyingly pedantic.

  21. mesaeconoguy:

    You clearly do not understand the purpose of bankruptcy.

  22. mesaeconoguy:

    No, please understand the difference between repudiation and bankruptcy reorg.

    One addresses the underlying problem, the other does not, and as a result has potentially devastating effects.

    If CA repudiates, its borrowing cost skyrockets immediately (along with other states facing similar problems, like IL, NY and Puerto Rico), effectively locking them out. That is the real warning this should carry – may or may not be paid back, nor interest serviced, and current holders beware too.

    In addition, it also impacts municipalities within the state.

  23. marque2:

    And you clearly do not understand what bankruptcy it is.