Posted on 01/19/2011 10:20:43 AM PST by FromLori
We often disparage the Wall Street Journal for being too spineless to tell it like it is when reporting on the state of the economy, but with last Friday’s lead story, New Hit to Strapped States, they pulled no punches. You can almost pick a paragraph at random and get a sense of how serious the cities’ credit problems are. This paragraph, for instance “Municipalities borrowed $122 billion of variable rate demand debt in 2008, roughly twice the amount of these types of loans borrowed the year before…” How did they get in so deep? The answer lies in the way they navigated the shoals of 2008. While most muni-bond debt is long-term, scads of jerry-rigged credit deals were struck that year to get municipal borrowers past the crunch. For the most part, this involved the use of so-called letters of credit – guarantees by large banks to backstop municipal borrowers when they were having trouble raising cash via bond auctions. Under the circumstances, noted the Journal, “Many municipalities scrambled to convert the debt into other instruments, including variable-rate demand obligations, which are long-term bonds with interest rates that reset periodically. For a fee, big banks guaranteed many of these deals.”
Now, the letters of credit are expiring, and although borrowers must have believed in 2008 that it would be easy to renew them a few years hence, this has not proven to be the case. In fact, if banks are willing to issue letters of credit at all, it is at prohibitively steep premiums. For municipal borrowers, the only alternative is to pay increasingly punitive auction rates at a time when they are struggling just to pay their bills. On Friday, those rates hit 5.01 percent for 30-year, Triple-A general obligation bonds, reflecting a ratcheting up of perceptions of risk. A notable casualty was a New Jersey agency that had to reduce the size of a bond issue by about 40%, and to pay a higher rate, because of soft demand.
Fed Has No Control
The Journal story stopped short of saying the cities are effed, but the implication is unavoidable. After all, this is not a market that the Fed can control, and it therefore seems entirely predictable that market forces will continue to raise the risk premium on municipal borrowing, even as cities struggle to balance budgets with a combination of job and spending cuts and tax hikes. You don’t have to be an economist to see that that those supposed remedies won’t work – that they will only energize a deflationary spiral that eventually will push hundreds of cities into bankruptcy before the furies are spent.
Meanwhile, this is one potential bailout that the Fed cannot propagate in the usual make-it-up-as-we-go-along way. That is notwithstanding the fact that the very phrase “Fed bailout of cities and states” crops up almost casually in news stories about mounting budget crises at all levels of government beneath the Federal. But we should be perfectly clear about what it implies; for even the mere hint that the Federal Government is considering backstopping cities and states could trigger a run on the dollar so violent as to topple the entire global house of cards.
In the meantime, not only is the credit crisis for cities and states not about to go away, it can only intensify as the year wears on. For that reason, we have trouble believing that 2011 will pass without a crisis of such severity that it will make us fondly recall 2008.
discount internet for bums...NBC/Comcast..
http://investing.businessweek.com/research/stocks/news/article.asp?docKey=600-201012281208KRTRIB__BUSNEWS_54850_35478-1¶ms=timestamp||12/28/2010%2012:08%20PM%20ET||headline||Comcast-NBCU%20deal%20includes%20discount%20broadband%20for%20poor%20families%20[The%20Philadelphia%20Inquirer]||docSource||The%20McClatchy%20Company||provider||ACQUIREMEDIA&ticker=GE:US
I used to buy a lot of muni bonds. Today I have none.
Oh yeah...it’s coming, sooner than later! If you’re in muni’s...you should be looking NOW for alternatives for those investments.
Don’t worry we can just print money!
Wheeeeeeeeeeeeeeeeeee!!!!
Muni Bond Crisis WILL Only Deepen. What is there to stop it? I keep hearing all these rosy scenarios being floated about the economy but I see little to nothing to back it up. Our debt is still at 100% of GDP and growing by $6 million every minute. Meanwhile, they're printing and borrowing money like it's going out of style to pay for stuff that the gubmint has no Constitutional basis for buying in the first place. I see nothing but a downhill slide coming as far as the eye can see. This is a generational thing. It ain't going away in our lifetimes. Behold, the new "normal".....
My city and the adjacent city wanted to foist a
$40 million bond for repair of a sports facility on
the backs of taxpayers. We said Hell No!. It was
put on the ballot and earned a 71% rejection. We
all could see the looming bond problems and had
no desire to place our homes in the line of fire
for such a frivolous use. The only beneficiaries
would have been the banks and construction
companies. Restaurants and hotels are secondary
beneficiaries. The folks burdened with the debt
had no tangible benefit at all.
Ruh Roh...
“After all, this is not a market that the Fed can control, and it therefore seems entirely predictable that market forces will continue to raise the risk premium on municipal borrowing, even as cities struggle to balance budgets with a combination of job and spending cuts and tax hikes.”
Why not? They just have Goldman buy the bonds at auction and then the Fed buys the bonds from Goldman—nice profit for Goldman and the Fed can pretend it isn’t monetizing the debt. That’s what they are doing for US Treasuries. So they will just buy up all the muni auctions to keep interest rates down.
There will be tremendous pressure from unions and hacks in state government to do precisely this.
sfl
Speaking of Goldman Sucks
Goldman Reports Average Employee Comp Of $430,700 As FICC Revenue Collapses
http://www.zerohedge.com/article/goldman-reports-average-employee-comp-430700-ficc-revenue-collapses
Totally Busted: The Truth About Goldman’s Bailout by the Fed
http://www.economicpolicyjournal.com/2010/12/totally-busted-truth-about-goldmans.html
Barack’s Wall Street Problem is Now America’s
http://www.noquarterusa.net/blog/2008/09/21/baracks-wall-street-problem-is-now-americas/
” Blankfein, a lifelong Democrat, probably falls into the camp of Masters of the Universe who will quietly continue to support the president but won’t make many public comments or host big fundraisers.”
http://dyn.politico.com/members/forums/thread.cfm?catid=1&subcatid=71&threadid=4896982
Is this the part where we are all supposed to start crying for these poor victims of the economy?
Or... perhapse better spelt “Lonk Eyelant.”
I thought it was “Lawn Guy Land.”
In the meantime, not only is the credit crisis for cities and states not about to go away, it can only intensify as the year wears on. For that reason, we have trouble believing that 2011 will pass without a crisis of such severity that it will make us fondly recall 2008.
In fact, for the past month, he has been trying to get people to take the pledge: Not one more federal taxpayer dime to bail out cities and States!
As far as the Fed is concerned, the consensus is that it is not within their charter; and considering that the Republicans have taken over the House, with Ron Paul as their overseer, the Fed will not buy City or State bonds to bail them out.
Check out the price tag.
Question for the states not stuck on stupid: Do you really wanna bail this out...?
Does anyone else have ads for muni bonds playing in their radio market? I’m hearing at least one every hour and that can’t be a good sign....
I’ll have to listen to that thanks. I sure hope they put a stop to it and the money printing.
Via freeper Presbyterian Reporter on another post...
“Here is a little factoid I ran across this morning on how the Fed is monetizing Municipal Bonds.
The US Treasury is buying Municipal Bonds and then the Treasury sells those bonds to the Federal Reserve under QE2.
By doing the transaction in this manner, Bernanke can say that the Fed will not bail out the states.
Here is the story from the Utah Housing Corp press release in November 2010—
“””Utah Housing Corporation announced the closing of a $107 million bond sale that provided 30-year fixed rate mortgage loans for over 700 low- to moderate-income families to purchase their first home. Borrowers applied and were qualified at approximately 250 different Utah branch offices of banks and mortgage companies.
These lenders sold the loans to Utah Housing, exhibiting a successful 33 year long public/private partnership. The $107 million bond sale was Utah Housing’s largest in over two decades. Utah Housing sold $39 million bonds to the US Department of Treasury along with $68 million to the open markets.”””
http://b2b.utahhousingcorp.org/PDF/PR_2010_11_09.pdf";
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