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City Bankruptcies Will Increase, Dimon Warns

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DIMON

As cities across the nation face increasing budget strains, the vocal group of experts warning about municipal defaults has gained a powerful member: Jamie Dimon.

The JPMorgan CEO said he expects to see more U.S. municipalities declare bankruptcy, Bloomberg News reports. His concerns echo those of Meredith Whitney, the analyst who has said the next major financial crisis will come from a wave of local government defaults, and those of famed investor Warren Buffett, who has called the municipal debt situation a "terrible problem."

"If you are an investor in municipals you should be very, very careful," Dimon said, according to Bloomberg.

His warning comes as local governments contend with painfully depreciated tax revenue, which in some cases threatens to ruin budgets. In the wake of the worst financial crisis since the Depression, cities and states have had to severely cut back their spending, even as the need for their services has grown. While official bankruptcy remains rare (Vallejo, California, is the most recent example), experts say there's trouble brewing.

Different cities have different problems, but one thing remains constant: there's not enough money coming in. Often, revenue isn't enough to cover even the most basic of services.

  • In Detroit, the problem has gotten so bad that a new proposal would deprive a fifth of the city of basic municipal services, like trash collection and police protection.
  • Neighboring Hamtramck has run out of services to cut, and expects to spend its last dollar early this year.
  • Prichard, Alabama, in a desperate response to depleted coffers, has illegally stopped paying its pensioners.
  • Newark has cut 13 percent of its police force.
  • Camden, N.J., one of the nation's most dangerous cities, has begun a process of cutting about half of its police department.

"It's a frequency issue," Whitney said on CNBC Wednesday morning. When host Andrew Ross Sorkin asked her to name the three municipalities most at risk of default, she refused.

"Too dangerous a game," Sorkin admitted.

Indeed, the bond market tends to punish the weakest cities. As ratings agencies downgrade municipalities, and as investors get nervous, yields on muni bonds rise, meaning it's more expensive for cities to borrow money.

"It's a downward spiral," George Rusnak, national director of fixed income for Wells Fargo, told the Wall Street Journal.

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