Investors Lose Everything--In An AAA Muni Bond

Investors Lose Everything--In An AAA Muni Bond

Municipal bonds are often regarded as some of the safest there are. But with a badly damaged economy, are these the last safe haven to collapse?

Not too long ago, the state of Nevada pulled a truly Simpsons-esque ploy. They took out fully six hundred million dollars in municipal bonds, paying off at seven and a half percent interest and backed by a triple-A rating. Nothing on earth is safer than a AAA bond, folks. They don't get higher.

But then, the bottom fell out. People decided paying the mortgage was a better move than playing the slots. Fewer tourists showed up, the monorail took in less in tickets, and then the bad news hit.

The monorail project's bankruptcy attorney confirmed that the July first interest payment would NOT be going out as planned. And bondholders would, in fact, likely lose their principal.

That's not just a fairy story, either--just ask DWS Investments, who bought six million bucks worth of those probably-now-worthless bonds for its Strategic High Yield Tax Free Fund (NOTAX).

This kind of catastrophe is generally unheard of--AAA bonds are rated that way for a reason--but while bond fund managers and bond issuers alike give their clarion call of "Nobody's perfect" while fund investors demand answers as to why their bonds are now suddenly beautifully embossed fireplace starters that they spent WAY too much for.

Plain and simple folks, it's disaster walking. If Minnesota can decide out of the clear blue to withhold state income tax refunds (as in, the money state residents OVERPAID the government via withholding in a year) and if California can issue IOUs and expect them to be treated like money and Illinois can have such a disastrous credit rating that their prisons don't receive BULLET SHIPMENTS unless they're paid for up front, then they can tell you where to cram your AAA rated bond at any given time.

What are you going to do about it? Sue? State governments are jammed full of lawyers and they've got WAY more cash than you! Some of it's yours! They can beat you by sheer attrition if they're feeling sufficiently froggy enough to jump.

Does this mean that all municipal bonds are a disaster in the making? No. Some states are still at least relatively fiscally healthy, as are some state projects. But one thing is clear: AAA doesn't mean what it used to. And as a result, the whole concept is starting--just starting, mind you--to look a little shaky.

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