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Bankruptcy Judge Christopher Klein just ruled that Stockton is allowed to enter bankruptcy. Recall that the bondholders and bond insurers had challenged the bankruptcy on the basis that Stockton had not done necessary due diligence.

Like I mentioned in a recent post, this battle is likely to go on for many more years and end up at the US Supreme Court. [1]

I have not read the full transcript of the judge’s ruling yet, but on the surface it is a clear victory for pensioners and Calpers.

From Bloomberg: [2]

Negotiation is a “two way street,” said U.S. Bankruptcy Judge Christopher M. Klein in Sacramento, addressing creditors who he said didn’t negotiate in good faith. “You cannot negotiate with a stone wall.”

In the course of the hearing today, Klein has also said that the city’s witnesses were credible and that the city was “by any measure” insolvent when it filed for protection from creditors.

The questions are:

1) Will muni bond buyers demand higher interest rates for California bonds since they appear to have lower standing than pension obligations? Yoda’s guess is yes.

2) If you were a muni bond insurer, would you write any more coverage for California bonds? Yoda’s guess is no at current rates.

3) If you are a California muni bond holder, will you consider dumping any of your bonds? Yoda’s guess is yes.

We will have to wait until the next inning starts . . . stay tuned and buy a big bucket of popcorn.



[1] Yoda post on Stockton bankruptcy

[2] Bloomberg story on Stockton bankruptcy ruling
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