Should you buy municipal bonds individually or in a fund?

J. Hunter Brown's comment on the municipal bond market

"Individual investors that are unfamiliar with indentures and some of the embedded risks - interest rate, credit, or liquidity, many of which are appropriately noted here - should stick to reputable mutual funds or ETFs. And there aren't a lot of them around...A major problem for individuals with the muni market is that there is little to no price transparency. The inefficient structure and informational risk of the market can put the individual investor at the mercy of a dealer trying to monetize an informational monopoly or unload a risk position."

is cited in WSJ: Should You Buy Municpal Bonds Individually or in a Fund? (Wall Street Journal, The Wallet, Feb. 3, 2009)

"A 2004 investigation by the National Association of Securities Dealers — now known as FINRA – assessed a total of more than $610,000 in fines and restitution on Charles Schwab, Edward Jones, First Trust Portfolios, Merrill Lynch, Morgan Stanley, Prudential Equity Group, UBS Financial Services and Wachovia Securities for buying municipal bonds from clients at unfairly low prices....According to the NASD, the fair market value of the bonds was 97.02, but a UBS broker executed the trade at 40.00 – meaning that more than half of the bonds’ total value ended up in the broker’s pocket. (All the firms settled the case without admitting or denying the charges.) That’s an extreme case of the problem that reader J. Hunter Brown points to in his comment: How can you know whether you get a fair price when you buy or sell an individual muni?"



Why not double down?

"Mr. Geithner, who was closely involved with the AIG bailout, offers no change ... His latest scheme is called the Public-Private Partnership Investment Program. But there is actually very little private skin in this game: It gives a handful of wealthy financiers huge nonrecourse loans to enable them to purchase toxic assets that the market supposedly won't buy at a "fair" price. As the housing crisis has shown, providing subsidized nonrecourse loans creates asset bubbles, not true price discovery. And bribing buyers to ramp up prices smacks of market manipulation." Amar Bhide


The new program offers non-recourse debt financing at ~20x leverage to the hedge fund crowd. It is a free option of unprecedented macro scale: a massive call option on the taxpayer wallet at a 5% premium.   'Heads they win, tails the taxpayer losses again'.

So, form a hedge fund, buy the maximum you can. If it works, you're rich. If it doesn't, just walk away. You only have 5% down.  It's your best shot.

"a little song, a little dance, a little seltzer in the pants..." - Chuckles the Clown

If the hedge fund isn't working for you, consider buying TIPS & selling long dated treasuries.


What the large print giveth, the small print taketh away

From the H-15 schedule published by the Fed:

"Trade data insufficient to support calculation of the 90-day A2/P2 nonfinancial rate for April 6, 2009. "

There is a hole in the bucket: this market is closed.

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