Every family encounters times when bills are due and they don’t have money. If this happens to a state or local government, they go to the municipal bond market where they can borrow short- or long-term. In the current market they are likely to find a lot of willing lenders. These lenders will lend at very reasonable interest rates, and the terms of the borrowing will be made public so taxpayers can see what their obligations are.
Since there is so much demand in the muni bond market I was surprised to see that the State of New Jersey was going to set-up a “bridge loan” with J.P. Morgan Chase, one of Wall Street’s biggest banks. The specific details of the borrowing have not been announced, but tidbits released in the media suggest that the lending rate from the bank will be twice the rate from the muni bond markets.
The consumer analogy would be using a neighborhood payday lender rather than taking a cash advance on a credit card. The payday lender would charge you 10% and the credit-card company would charge 5% for the same loan. These are made up examples, but give a glimpse into the most important variable when comparing the state’s borrowing choices.
I know that I’ve been writing a lot about Governor Chris Christie of New Jersey, but he has received so much media attention while other governors, like Andrew Cuomo of New York, have been quietly getting their state’s business done. I think this “bridge loan” is something that they would have preferred to do without media attention.
State officials are negotiating with J.P. Morgan Chase & Co. over terms for the bridge loan, following a spirited competition for the state’s business, several people familiar with the selection process said.