I came across the Motley Fool article that really had me thinking. Here are my random thoughts.
Municipal debt: Wasn't Berkshire Hathaway willing to take over Ambac's municipal business in the near recent past? Now he's saying that city and municipal debt will be a terrible problem 5-10 years from now. He's also wound down his municipal insurance business by over 90%. I wonder if he's changed his mind or if he was going to pay such a low price back then that a lot of large defaults wouldn't matter. If he did change his mind, what does he know now that he didn't know then.
I tend to believe that he's right on the money. Funny that: thinking Warren Buffett knows what he's talking about in the world of finance. I don't have to look any farther than my own city of Atlanta to find the biggest culprit: pension liabilities. http://tinyurl.com/2ap8nam "More than 20 percent of city spending is devoted to pensions. The city is spending nearly as much money on pensions as it does for its police department" This of course isn't sustainable. It took down GM and Chrysler (along with building cars nobody wanted).
This whole thing has me thinking a lot about collateral. Like why do we give so many people loans without anything to seize if they don't make their loan. The most obvious source of this type of loan is the credit card. Zero equity home and car loans are far behind, but at least you don't lose 100% of principal.
Tom Brown was a big advocate of MBIA over the last couple years. MBIA is one of the leading insurers of municipal debt. He runs a hedge fund second curve capital. He argued that the market wasn't properly valuing the company and he put his money where his mouth was. Between September 30, 2009 and December 31, 2009 he unloaded his entire stake in the company. Buffett cut his exposure as well as Tom Brown. If nothing else, these are two big reasons to worry about coming defaults.