MuniLand

Where are muniland’s cross-over buyers?

It’s an odd moment in muniland. There is an irregularity in the pricing of municipal bonds. Generally muni bonds have a lower yield than U.S. Treasuries because munis give investors a tax advantage. Investors use them to shield their investment income since coupon payments on municipal bonds from their state of residence are generally triple-tax-free — that is, they are not taxed at the local, state or federal level.

In this Bloomberg video Timothy Pynchon, a portfolio manager at Pioneer Investment Management, talks about how 30-year muni bonds are trading at 105 percent of the value of the 30-year Treasury. These bonds would usually trade at less than 100 percent of Treasuries because of their tax advantages.  This is a very unusual situation and would usually attract so-called “cross-over” buyers from other parts of the bond market. In the video, Cumberland Advisors’ David Kotok suggests that since U.S. Treasuries are mispriced (too expensive with low yields as a result of a flight to quality) it’s having a carry-over effect for long-dated municipal bonds. Basically the long end of the municipal bond market has moved away from its normal pricing relationships and is cheap relative to Treasuries.

Further:

Bloomberg: Colorado Refunds Transport Debt as Yield at Lowest Since 1994: Muni Credit

Bond Buyer: Muni Funds See Outflows for Fifth Straight Week

“What we had here was a wholly corrupt situation”

I’ve written several times that the potential bankruptcy of Jefferson County, Alabama is not the harbinger of a massive wave of defaults but rather a situation ridden with massive corruption. The corruption began in the late 1990s when sewer project contractors began overcharging. Many of them went to prison. The corruption was also a symbiotic dance between public officials and underwriters. It’s instructive to learn from what happened on this project so that public officials act with caution on the recommendations of underwriters. Wall Street’s preying upon municipal governments must stop. The Birmingham News has an excellent report today:

Christopher “Kit” Taylor, a financial consultant in Alexandria, Va. [and former chairman of the Municipal Securities Rulemaking Board], who has followed the county’s sewer debt crisis since 2008, said there was corruption on both sides.

“We don’t have a deal”

The Jefferson County Commission met last Friday to decide if they would accept a proposed settlement from creditors led by JP Morgan on their $3 billion of sewer debt. After many hours of meeting in executive session and in public, the Commission voted to reject the proposal, remove the court appointed receiver and directly negotiate with the creditors.

I watched the live webcast of the meeting and it was actually one of the most open and informed county commission meetings that I’ve ever seen. I give the Commissioners a lot of credit for their efforts to clean up a problem which they did not create. In the meeting there was a lot of indignation against JP Morgan and their role in burdening the county with several billion dollars of derivatives. Several Commissioners felt especially that there had been fraud in these transactions and were not willing to release their right to sue JP Morgan and other banks for these problems. There were also calls for increased transparency in the process. There was a lot of drama in the meeting.

The drama was only heightened when county commissioner, T. Joe Knight, saw a message on his mobile device in the middle of the meeting that said the Wall Street Journal was running a headline announcing that an agreement had been reached. You can see the video of Commissioner Knight above shouting, “We don’t have a deal”. When I clicked over to the WSJ.com the paper was running a story that quoted the state finance director and said that the Commission had accepted the proposal although the Commission had not yet voted. The Wall Street Journal eventually yanked the false story and replaced it with this account which makes their error seem less odious:

Chapter 9 struggle: Unions are buying power

“The unions are buying power”

This is a great video of Stephanie Gomes discussing her experience as a member of the City Council in Vallejo, California, as they struggled through a municipal insolvency and bankruptcy. She talks about the power of the police and firefighter unions and their stranglehold on local politics. Gomes comes across as passionate citizen who was willing to confront some of the deep-seated problems in her community. She highlights the importance of local and national media attention on the “dirty laundry” of municipal finances like high salaries and generous pensions for union workers. Her experience is an important lesson for anyone interested in muniland.

Video via Vallejo Independent Bulletin and WPRI.com.

Jefferson County nearly files bankruptcy but instead ditches negotiator

The Birmingham News ran this above video of Jefferson County Commission President David Carrington discussing the commission’s meeting on Friday when they voted to delay filing Chapter 9 bankruptcy, cut out their court appointed receiver and deal directly with bond creditors. From what President Carrington says, it sounds like they almost filed bankruptcy at the meeting::

I thought we were going Chapter 9. I think I could take a test on Chapter 9 I know it so well.

Jon Stewart dives into raterville

The Daily Show
Get More: Daily Show Full Episodes,Political Humor & Satire Blog

Jon Stewart’s Daily Show interview with Columbia law professor John Coffee is great. To have credit rating agencies discussed on a popular national comedy show is fantastic. The more the public knows about these powerful agencies, the better.

I generally agree with Professor Coffee but disagree with his statement that raters were the primary culprits in the financial crisis. The investment banks that created the subprime dreck and pimped the agencies to assign AAA ratings — they are the main culprits. Raters were just well-paid handmaidens to the banks which packaged mortgages. Banks also made the most profit from creating the crisis. He does identify investment banks as bad actors later in the video. Overall, an impressive performance by Professor Coffee.

I’ll write more about Professor Coffee and his adoption of my proposal for “equilivant disclosure” for bond issuers. This is the real solution to our credit rating problems. The lack of equal information flow to the ten SEC recognized raters is the true reason that S&P, Moody’s and Fitch control the ratings business.

Munis gain as stocks sell off

Munis gain as stocks sell off

In a risky world, we’re seeing a flight to quality that’s benefiting muniland. From the Los Angeles Times Blogs:

Turns out it was a good idea to keep the faith in tax-free municipal bonds last winter when so many investors were bailing out.

It was an even better idea to buy more munis at that point.

While the stock market has dived this week investors have been bidding up the value of many muni bonds, apparently hungry to lock in tax-free yields.

Watch Jefferson County Commission hearing live

The Jefferson County Commission is meeting now to review a counter-proposals from creditors lead by JP Morgan and decide whether to accept it or file for Chapter 9 bankruptcy. Live feed via the Birmingham News.

To recap, Jefferson County, Alabama is getting a lot of attention as it negotiates with the holders of $3 billion of sewer bonds. The county would like to pay $2 billion to settle the $3 billion of bonds outstanding and limit the rate increases county residents would have to pay. This arrangement would pay bondholders (led by JP Morgan) 66 cents on the dollar — not a great recovery but not outrageous either. Bondholders want the state to guarantee this new arrangement and stand ready to pay in the event of another default.

Update on creditor offer terms (August 12, 2011) via the Birmingham News:

THE CREDITORS’ NEW PLAN

> Refinance a principal amount of $2.326 billion, with $233 million going into a debt service reserve, $23.3 million paying issuance costs and $2.07 billion to redeem all outstanding sewer warrants based on negotiated concessions.

Geeks for democracy

Geeks for democracy

“How do you enable people to have a louder voice within their communities?” asks Conor White-Sullivan. He answered his own question by developing Localocracy, a platform that hosts community-focused discussion boards seeking participants who are registered to vote and who use their real names. Localocracy gives citizens an opportunity to generate discussions to influence each other, their government and journalists.

Conor is one of 16 winners of “Champions of Change,” a contest the White House hosted in June that showcased the potential of Web apps that utilize data sets made available by federal, state and local agencies. Developers who were chosen to attend created applications that enable users to find and organize pick-up games at public facilities, guide citizens through zoning ordinances and direct parents to child-friendly locations, as well as numerous other services. See more of this wonderful project at GovTech.com.

Jefferson County part 6

According to the Birmingham News the court-appointed receiver over the Jefferson County sewer system, John S. Young, announced late Wednesday that the bondholders had a counter-proposal for the county commission. This was a few short hours before the commission’s 1:00pm meeting today to decide to declare bankruptcy.

The state becomes the guarantor

Jefferson County, Alabama is getting a lot of attention as it negotiates with the holders of $3 billion of sewer bonds. The county would like to pay $2 billion to settle the $3 billion of bonds outstanding and limit the rate increases county residents would have to pay. This arrangement would pay bondholders (led by JP Morgan) 66 cents on the dollar — not a great recovery but not outrageous either. Bondholders want the state to guarantee this new arrangement and stand ready to pay in the event of another default.

There is an alternative option for settling the matter: a Chapter 9 municipal bankruptcy. The county is now prepared to go that route if necessary and have hired an expert attorney to lead them through the process if they so choose.

The county accumulated this sewer debt over a number of years to fund the development of an EPA-mandated sewer system. Its construction was laced with delays, cost overruns and corruption. It’s the poster child for disastrous public works and bad dealing by Wall Street. The credit rating for this debt started out as AAA in 1997 when it was issued. The bond insurer FGIC stood behind the debt and helped raise the credit to the highest level, AAA, from Baa1. In the chart above you can see the rating move in February 1997 as the insurer came in and pledged to repay bondholders if default occurred.

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.

Oh Illinois!

 

Oh Illinois!

Illinois has massive problems: the state has more liabilities than assets, and the credit-default swap market says they are the number one state at risk for default (see chart above). The Bond Buyer ran an excellent story on how the liabilities of Illinois are rapidly increasing:

In a sign of Illinois’ ongoing fiscal challenges, its net assets deteriorated by $8.4 billion in fiscal 2010, pushing its deficit in that category of financial reporting up to a negative $37.9 billion, according to a new report from state auditor general William Holland.

The figure takes into account the state’s accounts payable that were $9.1 billion in fiscal 2010 and $55.1 billion of debt obligations, including outstanding bonds and pension obligations. The figures provide a wider view of a state’s overall long-term fiscal health than the snapshot provided by annual budget numbers.

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