Muni sweeps: Derivatives transparency for dummies
Derivatives transparency for dummies
Much of the damage that occurred in the financial crisis of 2007-09 came through the use of derivatives. Wall Street sold these products to sophisticated and unsophisticated investors across the globe. I wrote about the efforts of the Pennsylvania Auditor General Jack Wagner to develop a database of swaps for local governments. This effort should be lauded and hopefully copied by other states. But the value of the information in the database is not as great as having near real-time trade information to compare the pricing of a new derivative.
The Dodd-Frank Act has authorized a lot of transparency for the derivatives market. It’s very complex and arcane, so don’t worry if you haven’t figured it out yet. The law firm Reed Smith has created a “derivatives transparency for dummies” chart and I thought it would help us understand the changes.
|Phase of trade||How Dodd-Frank Act attempts to bring transparency to that phase|
|Pre -Trade||A counterparty will be able to use a swap execution facility to find the best possible pricing on cleared, standardized swaps.|
|Post-Execution||A counterparty will be able to compare the price that it paid for a standardized swap with what others paid for the same swap. Then, on a going forward basis, it can analyze the effectiveness of its trading program (e.g., hedging program) and adjust that program as necessary.|
|Post-Trade||Over the life of a swap, a counterparty will know the actual price of a cleared swap and the mid-market price of a non-cleared swap. As a result, counterparties will have access to relative price information regarding their positions throughout the life of a swap (i.e., from clearing through termination of the swap).
Furthermore, regulators will be able to more effectively monitor the swaps markets for manipulative behavior, since ALL trades (both cleared and non-cleared) will be reported to swap data repositories.
Are tax exempts untouchable?
From Investment News:
“The urgent scramble to address the ballooning federal deficit will reasonably seek to uncover every scheme to broadly raise revenues, bringing all major tax expenditure loopholes under intense scrutiny,” wrote Steven Harvey, a senior portfolio manager, and Nathan Harris, a research analyst. “We believe it is unlikely that municipal entities will be penalized.”
The growth mirage evaporates
Everyone knows the story of Vallejo and their endless trek through the bankruptcy process. Now, as the Bond Buyer reports, a second California city that was built on new housing developments is close to failure:
Stockton, located 80 miles east of San Francisco, is more than twice the size of the Bay Area’s Vallejo and also has much more debt outstanding, making it one of the largest and more significant municipalities in the country teetering on the edge of bankruptcy.
As in Vallejo, Stockton officials say its finances are severely strained from a steep drop in revenues due mainly to the housing bust, while labor costs locked into contracts continue to rise.
Jeff Michael, director of the business forecasting center at the University of the Pacific’s business school in Stockton, said development and construction in the housing sector had been a major driver of the city’s economy, and was essentially wiped out.
I’m sure every state has one or more communities like Vallejo and Stockton, but states like Nevada and Florida might have a substantial concentration of these communities. Stay tuned.
Chicago: Free lunch and low cost internet service
Right on. From Government Technology:
Low-income families in Chicago who have children enrolled in the National School Lunch Program will now be eligible for subsidized Internet as part of a new public-private partnership between the city and Comcast.
The first-in-the-nation program, called Internet Essentials, will provide families of the 330,000 students who receive free lunches in public schools throughout Chicago with vouchers for subsidized computers for $149.99 plus tax, high-speed Internet access for $9.95 per month plus tax, and Internet training, according to the city.
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Wall Street Journal: Wisconsin Issuer Roils Muni Field