Is muniland hiding its borrowing?
Several financial-media outlets ran stories today about state and local governments ramping up their bank borrowing in lieu of issuing municipal bonds. Often this is depicted as “emergency” borrowing to fill thin periods of cash flows. The story of California’s possible “bridge loan” to tide over their current “bridge loan” in Bloomberg was cast this way.
But other media accounts suggest this bank borrowing is growing beyond emergency needs and banks are actively seeking it. Michael Corkery of the Wall Street Journal reports:
Teams of bankers are blanketing the country pitching transactions like the one in Orange County, as well as traditional loans, to government officials, people in the industry say.
While big banks still are tight-fisted with many homeowners and small businesses, they see cities, states and schools as one of their least-risky ways to put to work some of the piles of cash that have amassed on their balance sheets.
JP Morgan reported their second quarter results today and said:
[W]e lent to more than 800 not-for-profit and government entities, including states, municipalities, hospitals and universities.
The ramping up of bank loans to state and local governments is increasing at the same time that transparency in the municipal bond market has gone ahead full throttle. Municipalities that borrow from traditional bond investors are now required to make broad disclosures to ensure no material information is hidden. In contrast, borrowing from banks has minimal and often delayed disclosure requirements. I queried the Municipal Securities Rulemaking Board on what type of reporting is required for bank loans in muniland and they replied with this in an e-mail (emphasis mine):
Bank loans are not subject to federal securities laws, so disclosures to investors are not required, unless the state or local government subsequently does a public offering of bonds. Then, if the amount of the bank loan is material to the issuer’s finances, federal securities laws require the disclosure of the bank loan in the official statement for the bonds.
When a state or local government does a private placement of municipal securities (even if the placement is with a bank), the federal securities laws do apply. No disclosure documents can be misleading and, if a broker-dealer is the placement agent on the deal, the broker-dealer must report the placement to the MSRB. Any subsequent trades in the security would also need to be reported to the MSRB.
If the bank keeps the entire amount of the loan on their own books, then no disclosures are required. These can be very lucrative loans; several weeks ago the State of New Jersey arranged a line of credit with JP Morgan at twice the cost of borrowing in the bond market. So from the banks’ point-of-view, it’s easy to see why they would want to hold on to them.
But what do taxpayers know? I’d venture to say they will know nothing. It’s dark money that they are ultimately responsible for. Yes, Wall Street is dragging us all back into the dark again.