Pennsylvania may have suffered more damage from municipalities using interest rate swaps than any other state in America. Many cities and school districts were sold these “hedging” instruments after former governor Ed Rendell pushed legislation allowing their use in 2003. The fallout for the state has been devastating.
Jamie Dimon, the CEO of JPMorgan Chase, made headlines this week for an interview at the Council on Foreign Relations in which he said that buying Bear Stearns in March, 2008 was a “favor” to the Federal Reserve, and that JPMorgan had lost money on the deal. But there was another part of his interview where he talked about lending to states that caught my attention:
Bloomberg ran an excellent story recently about JP Morgan making a very low bid to win the underwriting role for Massachusetts’ latest general obligation bond offering. The bid reduced the interest rate the state will pay for the borrowed funds and vaulted JP Morgan to the top of the league table to finish the year. Slashing fees to move up league tables happens all the time in financial markets, but it’s unusual to hear the particulars:
The story of Jefferson County, Alabama filing the largest municipal bankruptcy ever last week is well-known. The county went into hock for about $3 billion to build an EPA-mandated sewer system. On the way to completing the system, every local crook and corrupt politician piled onto the project to skim off some pork. Many of these players ended up in prison and left the taxpayers saddled with a sewer system they really can’t afford.
I’m beginning to think that Europe’s sovereign debt crisis might kill more than municipal credit default swaps. As the financial system trembles alongside the deliberations of the Greek government, areas of the markets that have quietly lumbered along in the dark are getting more and more attention.
The solution to Greece’s debt crisis that Europe’s leaders announced on Thursday has market participants and commentators howling. It includes a provision that changes long-established rules for credit-default swaps mid-game. Mike Dolan, Reuters’ Investment Strategy Editor in Europe, said this:
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!
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.