Claremont Insider: An Insider First: Intelligent Financial Analysis

Wednesday, May 6, 2009

An Insider First: Intelligent Financial Analysis

A reader took exception to last week's breezy comparison here of the Certificate of Deposit Account Registry Service with the Orange County bankruptcy of 1994 and its effect on Claremont:

I noticed the other day that you referred to "Can anyone still spell O-R-A-N-G-E C-O-U-N-T-Y?" as an example of a municipality investment problem/cautionary tale which Claremont and its citizens should be aware of.

I am not involved in the city's management and don't have any relationship with those who do. However, as a financial advisor at Claremont's major brokerage firm, I do want to pass on a little of what I understand about the OC example which may add a little nuance to your understanding of the issue.

While it was indeed a real problem (created mostly by OC County Treasurer Bob Citron [right] but facilitated by conditions at the time such as taxpayers unwilling to accept higher taxes to remedy the problem, and a perhaps flawed strategy of liquidating much of the investment pool's holdings at an inopportune time, etc), a very easy case can be made that Claremont's investments as described on your site are substantially unlike the same kind of risk taking problems that faced OC.

Essentially, OC's real problem was excessive leverage... "Two dollars borrowed for every one dollar on deposit." (Source: California State Auditor, 1995" as quoted in a research paper which can be found at this link: ) is what eventually forced OC in bankruptcy.

However, one thing is not generally known by the average person when it comes to referring to OC as a poster child for municipal failure: investors in OC Muni bonds essentially came out OK. [emphasis added; and as we understand it, Claremont came close to breaking even in the OC mess, if you don't count the thousands of hours of staff, attorney, and expert time and energy]

While the word "default" when referring to OC meeting its obligations to muni bond investors is technically correct as OC sometimes delayed payments owed to investors, when one looks beyond that term you might find that in fact at least the Muni Bond investors eventually were paid what they were owed in terms of interest and dividends. As the NY Times put it, quoting a muni bond analyst Zane Mann: "Despite the bankruptcy, the county never defaulted on its bonds…"

In the Claremont case, from the limited info you have on your site, it looks as though they are just dealing with different ways to get CD type returns, and are not overleveraging.

It would take a lot of time to analyze Claremont's entire investment structure and I cannot really speak to that issue in general, but at least concerning the item you posted (a comparison to OC) I think that your warning about Claremont's ability to honor its debts or manage its investments doesn't really fit in this case.

That might be an important thing for you to note to your readers, as any investors who read your site might get overly worried about Claremont's financial strength and ability to pay its Muni bondholders what they are owed when it doesn't seem necessary. As we know when times are challenging some people might overreact which wouldn't really be a healthy response; overreactions tend to exacerbate problems as well. [there are so many ways to go in response to this paragraph. Let's just say that anyone basing his investments on so-called information on our blog deserves what he gets...]

All in all, Munis as an asset class are generally safe. As Moody Municipal Market Advisors recently put it: "The historical default rate for all municipal bonds (i.e., bonds of all rating categories) is 0.1%." That info is also available at under the heading "default rates." So in fact I think the value of working with an experienced advisor is all the more clear these days when the "do it yourself" and 401k type investors have lost so much due to their skepticism about professional help which could have helped them to reduce their risk back in the second half of 2007. At that time I was cautioning my clients that a recession was coming and to lighten on equities.

Whenever I hear the media ask "how come no one could have seen 08's economic problems and market losses coming?" I think to myself, "maybe its because they did not choose to have someone experienced as their advisor." Hope that helps put things in perspective a little...

Ken Salveson