Counterparties: Another day, another city

By Ben Walsh
July 11, 2012

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This is no Meredith Whitney-sized apocalypse, but it’s worth noting that San Bernardino is the third California city in two weeks to seek bankruptcy.

The San Bernardino City Council made the decision after a report by staff said it would run a deficit of $45 million in its current fiscal year and that further cuts were not possible: “The city has declared numerous fiscal emergencies based on fiscal circumstances and has negotiated and imposed concessions of $10 million per year”.

In the short term, this means San Bernardino will stop making payments on debt and attempt to find some sort of fiscal path forward. As Matthew DeBord notes, San Bernardino could come “out of bankruptcy with its debt reorganized and with a better chance to have a balanced budget and a reserve fund in the future”. However, debt payments are a small portion of the city’s deficit, so even under that rosy scenario, the city faces tough choices elsewhere. (The city is also contending with allegations of more than a decade of misreported city fund balances).

Twenty percent of the city’s workers have already been laid off, and many have taken pay cuts, DeBord reports. A recent auditor’s report noted that 31% of the city’s revenue comes from property taxes, and recovery to pre-housing-bubble levels seems unlikely. There’s also the issue of how to right-size spending on vital services like police and fire. Fellow bankruptcy-seeker Stockton, MuniLand’s Cate Long notes, ”[admitted] that the city has had little-to-no success in getting the pay of its public safety workers under control” and sought bankruptcy, in part, to renegotiate union contracts. The picture is brighter for San Bernardino, which spends only 42% of city funds on public safety, compared with Stockton’s 76%.

Although San Bernardino’s looming bankruptcy is having “basically having zero impact” on the bond market, there’s a bigger issue here. State and local government spending is in long-term decline: Two prominent forecasters expect it to fall to 10% of GDP by 2020 from 11.9% last year. Meredith Whitney may have been wrong about mass muni defaults, but we’re still seeing cities coming within just a few thousand dollars of insolvency. – Ben Walsh

On to today’s links:

Income distributions for Major League Baseball and the US as a whole are surprisingly similar – BMO
Muni bonds’ tax-free status limits their appeal to investors – Josh Barro

Inefficient Markets
More than 80% of the US equity premium is gained in the 24 hours before Fed announcements – Liberty Street Economics

Tax Arcana
In 2009, Americans paid the lowest federal tax rates in 30 years – WaPo

JPMorgan may claw back millions in pay from execs over the London trading scandal – WSJ

EU Mess
Under bailout terms, Spain may cede bank control, while investors face haircuts – WSJ

Take Your Time
Regulators have met just 37% of Dodd-Frank’s rule-making deadlines – Politico

Apropos of Nothing
The value of the general manager: Why corporations need more Michael Scotts – HBR Blog
Blame horses for pants – Alexis Madrigal

Appropriately Surly
Krugman: “I just did Squawk Box … it was one zombie idea after another” – NYT

MF Doom
US Bank is being drawn into the PFG investigation – WSJ


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Perhaps Krugman shouldn’t throw so many insults at CNBC since he works at an institution that these days has dramatically more prestige than intellect.

As a case in point, today Matt Levine at Dealbreaker explains how municipalities suffered a loss due to LIBOR manipulation – ipulating-banks-used-baltimores-tax-doll ars-to-help-pay-off-your-mortgage-or-som ething/ . The NY Times/Dealbook post – to which Matt links – doesn’t explain that the underlying issue was a divergence of LIBOR/SIFMA and instead includes phrases like “many [municipalities] borrow money through investment vehicles that directly derive their value from Libor” which sure sounds like someone who doesn’t understand an interest rate swap trying to write a description of an interest rate swap and missing the mark a bit.

All of this, BTW, is just a few weeks after Gretchen Morgenson had a featured Sunday piece, her gist of which was “municipalities are getting screwed because they are having to pay money to banks today on scary derivatives” and the reality of which is “banks borrowed at variable rates, changed that borrowing to a fixed rate through interest rate swaps, and today should be paying the exact same total interest cost that they expected because short-term interest rates have gone way down”.

If the NYT can’t hire some business/finance reporters that understand math and their subject matter, they ought to just focus on deal scoops and work a deal to license content on any complicated topic from the WSJ, the FT, or the Economist.

Posted by realist50 | Report as abusive

@Ben – the HBR blog article is a busted link as well as (I assume) the intended subject of mockery with your Michael Scott comment. I read it yesterday and thought it was actually a good article, and I’m a person who thinks that over half of the HBR articles/posts that I’ve read are utter crap full of management-consultant speak with little if any real world applications. This one makes a very interesting point that too many big companies keep everyone below the CEO in narrow functional silos, when having business unit heads who get a broad perspective is good for both company performance and executive development.

Posted by realist50 | Report as abusive

Good Lord – Please, not here. Ban the fu…….! Now!

Posted by MrRFox | Report as abusive

The headlines this week have been rather confusing…

Monday we read, “Great News, Spain announces austerity measures to get its financial house in order, markets set to rise in response.”

The last couple days we read, “Doom and Gloom, Spain announces austerity measures that will ruin its economy and send unemployment ever higher, markets plunge in response.”

One way or the other, Spain is in trouble (and the US as well). Did anybody really believe they had an easy way out?

Posted by TFF | Report as abusive

If I were Ina Drew’s lawyer I’d hope JPM tries to welch on my client’s $20Mil bonus. For, that would give her (and me) the ethical green light to lay waste to the entire top tier of JPM’s management – and come away with more than $20Mil for doing so.

Posted by MrRFox | Report as abusive

Agree with you on value of most HBR posts and their tendency to be filled with mgmt speak banality. Apologies for the busted link – not intentional. You are right that a bit of mockery was intended, but not complete. There’s some value to this idea but I think the real problem is that often the combination of these various business units is itself too complex. Adding a layer of generalists won’t help that problem too much.

Posted by Ben Walsh | Report as abusive

@Ben – no problem on the link, I didn’t assume it was intentional.

I agree with your point that just taking people who are already 40 or 50 year old specialists and then promoting them to be general managers of a business unit doesn’t really solve the problem – it just pushes the same problem down to business units instead of the whole company. I think the more interesting idea is encouraging people to spend time in different functional areas. At a minimum, there are ways to make sure that finance and operations people actually talk to sales people (or, even better, a customer) on occasion, which should benefit how a company functions as well as developing additional skills. Like everything, there’s the need to guard against going too far the other way, with too many people in long meetings that don’t have a point.

Unfortunately, some of this mindset has fallen by the wayside because it was easier to implement when the expectation was that people would stay with 1 company for an entire career.

Posted by realist50 | Report as abusive