MuniLand

An army of corporate lobbyists in the halls of Congress

Now that the Senate failed to pass President Obama’s jobs legislation last night, various pieces of his plan and other pet projects are likely to be introduced separately. It’s unclear whether an extension of the payroll tax reduction or additional unemployment benefits — two key planks of the President’s plan — will get floor time. But corporate interests are getting plenty of attention from members of the Senate. In particular, an army of corporate lobbyists has been vigorously promoting a tax holiday for U.S. multinationals.

Politico says the senior New York US Senator, Democrat Chuck Schumer:

has been quietly courting some Senate Republicans and Democrats to see whether there is any appetite for merging a GOP-backed idea — a tax holiday for corporations to bring home their overseas profits — with a Democratic-supported plan of creating a national infrastructure bank.

There is no evidence that giving multinational corporations a big tax break on profits earned overseas will create jobs or stimulate the economy. But some, like former director of the Congressional Budget Office Douglas Holtz-Eakin, believe that a tax holiday will actually create economic growth. Holtz-Eakin writes in Bloomberg:

Repatriation can be thought of as a private-sector approach to stimulus.

Both the left and the right have poured cold water on this idea. The Heritage Foundation, the conservative think tank, says the proposed holiday would not spur additional U.S. capital investment or jobs because corporations have plenty of profits onshore and there is easy access to financing. J.D. Foster and Curtis Dubay of the Heritage Foundation write (emphasis mine):

The current proposal would cut taxes, which is generally a good thing, but if another repatriation tax holiday were enacted, one should expect a similar result as last time: specifically, a surge in repatriations and little appreciable increase in domestic investment or job creation. The repatriation holiday would have little or no effect on investment and job creation, the key to the whole issue, simply because the repatriating companies are not capital-constrained today.

Injustice fuels the mob

CNN’s Erin Burnett recently made a visit to lower Manhatten to assess the Occupy Wall Street protest. Based on accounts of her visit Ms. Burnett seemed a little dismayed that those protesting didn’t understand the financial crisis very well. Rawstory.com reported:

The protester was asked if he knew that taxpayers had “actually made money” on the Wall Street bailout, to which he responded he was “unaware.”

“Yes, the bank bailout made money for the taxpayers, right now to the tune of $10 billion,” Burnett said. “Those are seriously the numbers. This is the big issue? So, we solved it.”

More Whitney rebuttals

The media is full of municipal bond market participants rehashing Meredith Whitney’s prediction of muni collapse which began last September. From Bloomberg:

[Meredith] Whitney, the banking analyst who predicted Citigroup Inc.’s 2008 dividend cut, said on “60 Minutes” on Dec. 19, 2010 that there would be “hundreds of billions of dollars” of municipal defaults within 12 months.

Data from [John Hallacy, Bank of America Merrill Lynch’s head of municipal research in New York], Standard & Poor’s and Municipal Market Advisors show the opposite.

The weakest states are stronger than U.S. banks

The weakest states are stronger than US banks

I noticed something very interesting in some research that Markit, a data provider that tracks the credit-default swap market, released yesterday: the worst U.S. municipal credits (California, Illinois and New Jersey) are considered much stronger than all the major U.S. banks save JP Morgan. New York state is considered stronger than Mr. Dimon’s bank!

Why this is especially important in muniland is that these U.S. banks write a lot of credit-default swaps insuring the debt of these large states, which seems upside-down given that credit markets view the banks as weaker than the states they insure. This raises questions about the validity of the whole muni CDS market. I’ll dig around on this issue a little more.

Heavy political support for ending municipal-bond tax exemption

Bloomberg writes about several strong political forces in favor of ending the tax exclusion from municipal bond interest payments. I still haven’t seen a definitive cost analysis of the change though. Maybe the President’s proposal to reduce the tax exclusion on muni bonds for those earning over $200,000 is a signal to Republicans that the administration is willing to negotiate the issue. From Bloomberg:

Solyndra’s funny money flow

Solyndra is the bankrupt solar company that received the first Department of Energy loan under the 2009 American Recovery and Reinvestment Act. It also is notorious in that its largest financial backer, George Kaiser, was a substantial supporter of President Barack Obama in 2008 and regularly visited the White House following the election.

Many media outlets have been covering the contacts between George Kaiser, Solyndra officials, administration officials and members of Congress. A rich paper trail will no doubt yield the facts of SolyndraGate. But my interest has always been in following the money trail and trying to understand how the United States, contrary to law, became subordinate to George Kaiser’s Argonaut in bankruptcy court. I previously quoted the applicible law:

US law 10 C.F.R. §609.10(d)(13), the government should have become first in line for repayment (page 2):

Vermont rebuilds while Congress fights

The state of Vermont is struggling to gather funds to repair the flood damage from Hurricane Irene, the state’s worst natural disaster since the floods of 1927. Generally the state would rely on support from the federal government to replace and repair this infrastructure, but the U.S. Congress is locked in a fight over funding the Federal Emergency Management Agency as part of a larger fiscal battle that could shut down the federal government. From CBS News:

Congress is headed for a showdown over disaster relief funding that could bring the government to the brink of a government shutdown again.

House Speaker John Boehner has scheduled a vote tomorrow on a bill that would keep the government operating through Nov. 18. If the Senate and the House do not approve the stopgap measure, known as a continuing resolution, before the fiscal year ends Sept 30, the government would be forced to shutdown.

Who are the “job creators?”

As the congressional supercommittee begins its budget-cutting efforts, state and local governments are worried about looming cuts to their federal grants. From Bloomberg:

In statehouses across the U.S., a budget-cutting congressional supercommittee and the sputtering economy threaten a fledgling recovery from the worst fiscal crisis in more than 70 years.

To create a more balanced approach that includes revenue increases as well as spending cuts, President Obama has proposed to raise taxes on the highest earners by reducing their tax exclusions and deductions (of which the municipal bond tax exclusion is a relatively small part).

Expanding the force field

After the financial crisis crescendoed with the failure of Lehman Brothers (who filed Chapter 11 bankruptcy three years ago today) many unsound financial arrangements were exposed.

Many of the arrangements that failed were derivatives that had been created to hedge interest rate volatility for municipal debt. Following Lehman’s failure interest rates spiked rapidly as bond market participants withdrew liquidity and moved to cash. Because of this withdrawal of liquidity a lot of the municipal derivatives arrangements went upside down and exposed school districts and municipalities to large losses. Because of embedded penalties most were too expensive to unwind. A classic case involved interest rate swaps associated with Harvard University borrowings that lost at least $500 million on payments to escape derivatives.

Harvard has a highly professional staff overseeing investments but most municipal entities rely on outside counsel to advise them on municipal debt issuance and help negotiate derivatives arrangements. Although they play a central role these muniland players were not regulated until the Dodd-Frank Wall Street Reform and Consumer Protection Act gave oversight over them to the Municipal Securities Rulemaking Board. Overseeing muni advisors is part of the transformation of the MSRB from a sleepy, backwater financial overseer to an aggressive, forward looking regulator.

Municipals are a small part of the American Jobs Act

President Obama held a ceremony on Monday in the Rose Garden, complete with a backdrop of teachers and law enforcement officers, to promote his American Jobs Act. The President has insisted that his proposal would be fully paid for by tax increases on the wealthy. What was less reported was that the $447 billion of proposed tax increases, Section 401 in the legislation (page 134), would not occur until 2013 and would stretch over 10 years. So under the President’s proposal there would need to be tax increases of approximately $47 billion a year from 2013 through 2023.

It’s been reported that Republicans are cool to the President’s proposal and it’s likely that they will object to paying for new stimulus programs with revenue generated in the next decade. In addition, the President’s proposal for $447 billion in tax increases will have to be added to the $1.5 trillion of savings that the Congressional super-committee will be looking for. So if the President’s proposal is embraced, the super-committee will need to find $2 trillion of savings from the federal budget over the next 10 years.

The bulk of the proposed tax increases in the President’s plan will come from adjustments in the deductions allowed for municipal interest and itemized deductions for individuals earning over $200,000 per year. This would account for about $400 billion of tax increases over ten years.

The Infrastructure Privatization Bank

The first time many heard about the United States creating a infrastructure bank was in President Obama’s Thursday speech, but the idea has actually been floating around Congress for a number of years. Former U.S. Senator Chris Dodd of Connecticut proposed the idea in 2007 with inauspicious timing. From the American Water Works Association:

In an eerie coincidence, legislation to create a National Infrastructure Bank to address the need for financing of infrastructure projects was introduced with bipartisan support in the US Senate the same day a bridge collapsed in Minneapolis.

The horrific 2007 bridge collapse in Minneapolis is often used as the poster child to promote a national infrastructure bank. In 2007 there were 75,000 other bridges in America that had the same rating of “structurally deficient” as the Minneapolis bridge; the problem continues today. The need for massive spending on our roads and bridges is well understood by everyone.

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