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Money market funds and California RANs

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There’s one group of investors that aren’t likely to jump at the chance to buy California’s short-term RAN notes when they go on sale later this week: money market funds.

The notes are expected to carry a second tier rating of MIG 2, a notch below the top rating of MIG 1. That’s problematic for money market fund managers who are staring at the SEC’s proposal to limit money fund investments to short-term debt rated only the very best.

Higher Credit Quality: The proposal would limit money market funds to investing only in the highest quality securities — that is, not “Second Tier” securities. Currently, most funds are permitted to invest up to 5% of their assets in “Second Tier” securities.

5% may not seem like a lot, but when money market funds hold roughly $3.8 trillion in assets, it’s not chump change.

California debt rush

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Talk about a comeback. After a bruising budget fight that forced it to issue IOUs, California plans to sell as much as $10.5 billion in short-term debt later this month.

A reach for yield should trump lingering doubts about the state’s prospects among the small and large investors who are expected to snap up the revenue anticipation notes.

California hosts garage sale to raise funds

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California Governor Arnold Schwarzenegger is pulling out all the stops with the state’s “garage sale” of unclaimed or unneeded merchandise. The idea came to him via a “tweet,” he’s using his Hollywood cache to juice bidding and it’s all in the name of belt tightening.

The LA Times has the story:

In his latest effort to balance the budget, the governor is cleaning out the state’s storage sheds and holding a garage sale on Craigslist and EBay.

California IOU’s soon to be DOA

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As J.P. Morgan Chase has seemingly been the only rock in the financial storm, it is not surprising that the bank is now helping California, lending it $1.5 billion. The money will enable the state to stop issuing IOU’s a month earlier than planned (on Sept. 4). The loan is essentially a bridge until the state sells $10.5 billion in short-term notes next month. Here’s Reuters’ story.

The Los Angeles Times says:

The risk to JPMorgan is virtually nil: The loan will be repaid by late September, when the state plans to sell $10.5 billion of so-called revenue anticipation notes, or RANs — securities that will mature next spring. Individual investors are expected to flock to the RAN offering as a place to stash cash, because the notes should offer much more lucrative returns than money market funds and other short-term accounts paying next to nothing.

California’s topsy-turvy trickle-down

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The proposed California budget is looking an awful lot like trickle-down economics. But instead of the classic theory of wealth at the top seeping down to the bottom, the budget would have the state push losses down the pecking order to local governments.

While the full legislature isn’t expected to vote on the proposal until Thursday, the broad outlines of the budget should make the state’s cities and counties shudder, since the proposal would deprive them of already dwindling revenues at a time when borrowing your way out of a jam isn’t much of a fallback plan.

California IOUs don’t look so hot anymore

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Reuters is reporting that California lawmakers are close to inking a deal to close the $26.3 billion budget gap. You know what that means: no more IOUs. So don’t expect to see the IOUs popping up on a trading screen near you.

While a deal will bring the IOU drama to an end, it should create a new one in financial markets: a jump in California muni bonds since an agreement takes the prospect of default – no matter how unlikely it was in the first place – off the table.

Niche broker-dealer ready to trade IOUs

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For those eager to buy or sell California IOUs, SecondMarket, a niche broker dealer that specializes in hard to trade assets, will launch its trading platform for the warrants on Wednesday.

But that doesn’t necessarily mean that trading will start tomorrow.

Buyers such as municipal debt portfolio managers, hedge funds and institutional investors are lining up for the service, according to SecondMarket spokesman Mark Murphy, but sellers not so much.

The constitutionality of California IOUs

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Matt Yglesias questions here whether California is violating the constitution by issuing IOUs.

First you’d have to determine whether the warrants are debt or currency. States are prohibited from circulating their own version of the greenback.

Are IOUs securities?

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That’s the question lots of folks are asking as they try to figure out how to potentially make money from the billions of dollars in IOUs being sent out by California this month.

If the Securities and Exchange Commission says yes, then two other regulators will be pulled in: the Municipal Securities Rulemaking Board, or MSRB, which would monitor the situation to make sure everyone is playing by the rules, and the Financial Industry Regulatory Authority, or FINRA, which would knock heads if there’s any wrongdoing.

Paying taxes with California IOUs?

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From the AP via the Sacramento Bee, it looks like a lawmaker is proposing that California follow the Argentine model.

From AP:

State vendors and contractors could use their government-issued IOUs to pay state taxes, fees and liens under a bill approved by an Assembly committee.

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