Opinion

Bonds away! Buffett bets against Bam

Is the sky really falling on state and local governments, as Warren Buffett’s recent bearish bet on municipal debt suggests?

Much of the media and even some sophisticated investors think so — even if Buffett’s bet against munis was only cryptically disclosed in a quarterly filing of his investment company Berkshire Hathaway (he has yet to make a public comment on it).

And even if, when you dig deeper, the move suggests Buffett wasn’t making a bet against all munis but only those that adopt some of the same policies he and President Obama are advocating on a national level.

Warren Buffett, of course, is a great investor, but a lot of what he does, particularly these days, has a political message as well.

He has wholeheartedly supported President Obama’s economic agenda of higher spending and higher taxes on wealth creators to pay for the welfare state both he and the president envision.

He even allowed the president to use him as a political prop and put the Buffett name on a new tax that won’t raise much revenue but may win the president a few more votes as he fights for re-election.

Which is why the last thing he wants to do is explain that his move isn’t a bet against all bonds but just some of those in areas that have adopted the same misguided fiscal policies both he and the president are advocating on a national level.

Yes, states and cities face daunting economic challenges: high, unfunded pensions, dwindling tax revenues and (particularly here in New York) a continued addiction to debt to pay our bills. But when you look at the stats, bond defaults, outside a few instances, are rare, and you can make a good case that places have weathered the country’s economic malaise by rejecting the very core of Obamanomics.

Governors like Chris Christie in New Jersey, Scott Walker of Wisconsin and (to a far lesser extent) Andrew Cuomo here in New York have cut government, demanded concessions from workers and avoided economy-crippling tax hikes. Contrast this with those state and local governments that face the greatest fiscal difficulties and where defaults are actually occurring. They all seem to have certain things in common, namely they’ve adopted the same welfare-state policies advocated by Obama and his buddy Buffett.

Of course, it’s hard to generalize when it comes to municipal bonds. Municipalities default for many reasons — Jefferson County, Ala., made a bad interest-rate bet on debt used to finance a large public project — so it’s not just the economy and lower tax revenues that cause fiscal stress and bond defaults, but also poor management.

Also keep in mind, Buffett didn’t hold actual municipal bonds through Berkshire Hathaway; he owned a credit-default swap, an agreement to insure another investor’s portfolio (in this case, the estate of the bankrupt Wall Street firm, Lehman Brothers). So he may have simply been selling his portfolio because it had made a decent profit, not because he thinks the entire municipal market will soon be awash in a sea of defaults.

We have a better handle on debt Buffett is betting against. Calling around, his exposure doesn’t appear to be in a broadly diversified portfolio of municipal bonds, but rather in the debt of about a dozen governments, with significant exposure to two of the most cash-strapped states, California and Illinois.

And that should tell you a lot about the move. California has the dubious distinction of being home to three cities that lavish their government workers with such costly salaries and pensions that they’ve had to announce bankruptcy and either have, or will, default on their debt.

On the state level, California Gov. Jerry Brown also thinks raising taxes is the way to save the state, even as wealth producers and business bolt for lower-cost states. He’s banking on a “stimulus plan” involving a high-speed railway — an $8 billion boondoggle that the state can’t afford and that, judging by the Obama stimulus, will leave California with more debt and few new jobs.

The fiscal situation in Illinois is no better than in California. Democratic Gov. Pat Quinn hasn’t been shy about hiking taxes, but the state’s deficit continues to swell; its pensions are woefully underfunded, and businesses are leaving in droves for nearby Wisconsin.

Maybe that’s why Buffett has been loath to publicly clarify his big muni bet: If he did he’d have to concede his folly and the folly of the president he supports as well.