MuniLand

Lending by banks is running ahead of the law

Thou know’st that all my fortunes are at sea;
Neither have I money nor commodity
To raise a present sum: therefore go forth;
Try what my credit can in Venice do

Antonio, The Merchant of Venice

Sovereign borrowing from powerful banks is centuries old. Venice was the Wall Street of the early Renaissance. The banks located in the watery grandeur there loaned money to faraway kings and traders. Kings didn’t regulate banks but they did often force repayment by raising an army.

Our government reaches far beyond the actions of kings, who merely wanted their money back, and attempts to regulate banks. The government borrows and it oversees. It’s a big effort as the new financial reform law, Dodd-Frank, more strictly regulates the capital adequacy of banks and enforces “fair dealing” and transparency. Reining in the practices of banks and securities firms is hard work but it’s vital to protect our public institutions, taxpayers and investors. Well regulated banks and the rule of law cancels the need for armies to be raised to have a functional financial system.

Cities and states use banks to raise money to build schools and sewer systems. This is primarily done through the municipal bond market which is becoming a well regulated area of the financial system.

Increasingly, though, public entities are borrowing directly from the banks in lieu of issuing bonds. New Jersey and California recently took out multi-billion dollar loans from banks instead of using the debt markets. This illustrates how powerful the banks are that they are big enough to lend to state as big as California. The problem is that this is done in the dark with no requirement for disclosure or fair dealing by the banks. The practice of direct lending by banks is running ahead of the law. And it poses two problems.

Supporting less prosperous brethren

There are many financial linkages between various levels of government in muniland but everyone eventually has to stand on their own. It’s like the cousin you grew up with but don’t see much now other than holidays. When your cousin loses their job and their mortgage is being foreclosed you want to help but in a limited way. You want the cousin to get a job and cut a deal on their mortgage or do a short sale. You don’t want them moving into your home or having access to your bank account. It’s the same between the federal, state and local governments. They are cousins. But not that close.

My fellow Reuters blogger, Felix Salmon, said yesterday that states are considered too-big-to-fail by the financial markets:

There’s certainly a general understanding, in the markets, that California is too big to fail: if push came to shove, the federal government would bail it out rather than let it default.

What would a debt-limit crisis cost the states?

Thanks to Jordan Eizenga at the Center for American Progress, you can see some scenarios of the impact of the halt in payments to states if the debt ceiling is not raised. Jordan says:

The key thing to remember is that these are cuts that would occur even if we protected Social Security, Medicare, Medicaid, defense, and UI. Failing to raise the debt limit causes unavoidable pain to states.

Roll your mouse over to see the effect on each state. More analysis here.

It’s on in Alabama

The crisis in Jefferson County, Alabama is quickly coming to a head. The County Commissioners’ willingness to file for Chapter 9 municipal bankruptcy is putting a lot of pressure on bondholders, led by JP Morgan, to agree to a settlement. It appears that the entire Alabama political structure is aligned to do the best for their citizens. Right now the epicenter of the struggle between the people and Wall Street is Birmingham, Alabama.

The growing gap

The debate between President Obama and Republicans in Congress is getting more and more confusing. The graph above might help a little in understanding what the basis for the argument is. There is a large and growing gap between revenues and outlays. The deficit, or the difference between what comes in and what is paid out, is funded by selling U.S. Treasury bonds. We have reached the upper bound of what we can issue unless the Congress increases the debt limit. This has repercussions everywhere, including states.  Reuters has an excellent overview of the effect on the states since they rely on the federal government for a significant portion of their funding.

A very good discussion of the larger issue is happening at Econbrowser:  Data: Spending and Tax Receipts, 1967-2011.

Data in the graph comes from the Congressional Budget Office.

Another short-term loan for California

The uncertainty about a federal debt deal has California seeking a short-term loan in the private loan market. This will carry the state until it can issue short-term bonds or revenue anticipation notes (RANs) in the bond market in August. Bloomberg reports:

Singing the passion song

Singing the passion song

Kathleen Kennedy Townsend, the former lieutenant governor of Maryland, writes passionately in The Atlantic about the need to create jobs in the United States, especially those linked to infrastructure. I welcome her opinion as we need more passionate voices drawing attention to the need to stop outsourcing American jobs. We will never recover if we make economic decisions solely on the the basis of manufacturing costs. Ms. Townsend says:

As a country we have to decide what our values are. Do we really want to be a nation that funds our spending spree through the Chinese, who then make our goods and do our work while we go into debt and remain unemployed? Work is more important than saving tax dollars. Jobs are critical. Work, not an unemployment check, is what makes people feel they are worth something.

I hope the combined forces of politicians, the unions, and the Chamber [of Commerce] will eventually overcome the resistance to the infrastructure bank. We need to create jobs, and we need to rebuild our roads, railways, sewage, and water systems. Most of all, we need to revive our sense of energy and excitement — the deep fulfillment that comes of making things we can touch and feel, things that really improve our lives.

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.

Property taxes are all over the map

From Credit Sesame (click through the map above for an even better interactive version):

Other than their mortgage, most home owners’ largest home-related expense is their property tax bill. And it’s no secret that when it comes to property taxes, some states are much harsher than others. Consider this: In 2009, New Jersey home owners paid an average of 27 times more in property taxes than property owners in Louisiana. Ouch.

Hat tip to The Big Picture.

Potential U.S. rating downgrade rattles muniland

Bloomberg reports:

At least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade, Moody’s Investors Service said.

America will never recover when China builds our infrastructure

End game for America’s jobs

America will never recover if we outsource everything, including our public infrastructure. Bloomberg made the excellent video above about California outsourcing the construction of a portion of the San Francisco Bay Bridge to Shanghai Zhenhua, a Chinese firm. Shanghai Zhenhua is assembling the section and will then ship it to California for installation. The state is supposedly saving $400 million with this move. The workers at the Chinese facility are making $12 dollars a day.

In times of fiscal stress it’s easy to understand why public entities are trying hard to cut costs. But this “cost cutting” is really just off-shoring American jobs. Something has to give — we can’t recover without creating American jobs. It’s our choice, and I choose spending more and creating jobs at home.

Background on the project from Bloomberg.

Hungry market gobbles up new municipal bonds

Bond Buyer reports:

The week’s new inventory can’t seem to reach the muni market fast enough. One trader in Florida said there is little product anywhere. “There are fewer bonds than usual,” he said. “It’s hard to find anything to sink your teeth into.”

The foolishness of Ann and Amanda

Television is my least favorite medium because pundits usually strike outlandish poses that are wholly disconnected from the facts. Case in point is the short video above from MSNBC with Chris Hayes of The Nation, author Amanda Foreman, pundit Ann Coulter and political commentator and comedian Bill Maher. What are these people talking about?

Amanda Foreman: “Government doesn’t create jobs. Ideas create jobs. Innovation creates jobs.”

Fact check: State and local governments employ approximately 19.6 million people.

Insurers have “manageable” muniland risk

Insurers have “manageable” muniland risk

Meredith Whitney has made many assertions about muniland, but the only one that I had not heard from others before she stepped onto the national stage was her contention that insurance companies would be forced to sell their municipal bonds into a declining price spiral. She alleged this would collapse muniland, so it’s very interesting to see Moody’s assess the risk for insurance industry. From Property Casualty 360:

Property and casualty insurers remain the most exposed sector among financial institutions to volatility within the municipal-bond market, holding about $355 billion in municipal bonds, but the overall level of risk should be manageable, Moody’s says.

In a Special Comment, Moody’s says municipal bonds represent 60 percent of the industry’s equity capital base, as measured by policyholders’ surplus. This figure is down from the prior year, when the industry held about $370 billion in municipal bonds, representing about 70 percent of policyholders’ surplus.

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