Defaults on tax-exempt municipal bonds like those issued on Whoops have been relatively infrequent and have usually involved smallish sums. Only 685 defaults have occurred since 1940, out of 301,016 municipal bond issues. In terms of money lost, each of the three largest were around one-twentieth the size of last week’s fizzle. The West Virginia Turnpike Commission defaulted on $133 million in bonds in 1958. Chicago’s Calumet Skyway collapsed under bond indebtedness of $101 million in 1963, and investors were short-changed in 1978 when the Chesapeake Bay Bridge and Tunnel Commission reneged on $100 million worth of bonds.
New York City’s near miss in 1975 does not count as a default, at least technically, because the city secured moratoriums on short-term interest payments until it could again start paying its creditors. If the Big Apple had defaulted, it would have been slightly ahead of Whoops’ record, at $2.4 billion.
Until the Whoops debacle, the biggest bond defaults had come in the private sector. The Penn Central ran out of cash bonds June 1970, forcing it into what remains America’s biggest bankruptcy: $3 billion in liabilites, including $1 billion worth of bonds.
Foreign bonds are riskier because it is difficult to force payment or arrange settlements. The Wall Street firm Carl Marks & Co. is still fighting a class-action suit against the People’s Republic of China to recover losses from Hukuang Railroad bonds issued by the imperial Chinese government in 1911. Last year a U.S. district court in Alabama ordered China to cough up to U.S. bondholders the unpaid principal plus the interest that has been mounting at 5% annually, a total of $41.3 million. Marks also has two suits against the Soviet Union involving $75 million in dollar-denominated bonds issued by the imperial Russian government. The bonds, held by U.S. investors, were repudiated by Moscow after the 1917 revolution. Daniel Collier, a Marks vice president, is not holding his breath. In his firm’s offices, one of the Russian bonds is mounted, with a small hammer beside it, along with the words: IN CASE OF SETTLEMENT, BREAK GLASS.
Even if the court actions fail, some of the paper still has value. A Hukuang Railroad bond for 20 gold pounds ($96) that is in good condition is worth from $50 to $100 as a collector’s item.