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100 Muni-Bond Auctions Fail

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Unprecedented disruptions in short-term debt markets.

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I recently wrote a piece entitled The Next Shoe to Drop. The piece talked about the problem in Muni-land and in specifics the land of closed-end muni funds. Closed end funds typically borrow short, lend long, like one big muni bond margin account.

There were over 100 failed auctions in Auction Rate Securities yesterday, notably some in the closed end space. This is a first and it is important.

Why? Imagine you had a margin account where you were forced to pay a higher margin rate and your bonds were falling in price? It is a lethal combination.

If I could borrow these funds I would short them, but they are notoriously hard to borrow. The sad part is that these funds were more financial alchemy by the folks on Wall Street. There are approximately $265 billion outstanding.

I know this: If I owned 'em, I would blow 'em out. If I could short 'em, I would, in size. This is a mess and mom-and-pop retail won't likely find out about it until it's too late.

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No positions in stocks mentioned.

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