Statement of Helen Kirkpatrick at Field Hearing on State of Municipal Securities Markets
December 7, 2010
Good morning. My name is Helen Kirkpatrick. I currently serve on the Board of Directors of the Washington Chapter of the American Association of Individual Investors, an organization serving 150,000 members. My remarks, however, are my own and do not represent the position of the Association.
Since we are here today to discuss bonds as an investment vehicle, I will begin by pointing out that the most recent national survey of AAII members reveals that their bond and bond fund allocations are at 21.8 %. This is the 10th time in eleven months that fixed income allocations have exceeded 20 %. The historic average is 15%.
Many bond investors appear to be most interested in muni bonds for retirement income. Many rely on high-quality broadly diversified municipal funds …funds that receive high ratings from Morningstar in particular. This is because most investors, including myself, have difficulty judging the safety of individual bonds --- never more so than now --- when bond insurers are leaving the market, forcing investors to attempt to determine the credit quality of municipalities issuing bonds.
Compounding the problem, it is my understanding that the three biggest ratings firms, Moody's, Fitch, and Standards & Poor, recently aligned their ratings scales for municipals with that of other bonds …for simplicity's sake. The net effect of this change was to upgrade many municipals, according to a recent article in the Washington Post.
Subsequently, the percentage of municipal bonds rated AA or better at Fitch rose from 52 percent to 82 percent. Obviously, such grade inflation dilutes the value of ratings. The problem of finding high quality municipals is further hindered because many states and local governments are deep in debt and collecting less revenue due to the current economic downturn. Therefore, bond investors face the challenge of cash strapped state governments trying to issue bonds….and…at the same time….issuing Build America Bonds, a federal government issue.
This leaves the average bond investor seeing STARS, not safety.
I personally would like to see an uncomplicated rating system and what I call "The Parental Approach" toward promoters of all investing vehicles, i.e.; clear regulations that spell out exact simple rules or directives …. With the caveat that any change or attempt to skirt the rules is strictly forbidden.
For film buffs, I would like to close this statement by recommending the movie "Inside Job" currently playing in theaters around the country. For lovers of books on finance, I recommend Michael Lewis's "The Big Short" which chronicles the history and players in our sub-prime crisis.