On Tuesday, California’s attorney general filed suit against housing giants Fannie Mae and Freddie Mac, the WSJ reports. The suit seeks to force the firms to answer an extensive list of questions about the mortgages they purchased in the state, including details on which properties are vacant and those that have been foreclosed upon. The move is particularly contentious as the companies are under the conservatorship of the federal regulator, the Federal Housing Finance Agency, that has already rebuffed previous requests for information from the California attorney general’s office. The two housing agencies guarantee more than half of the $10.3 trillion of mortgages in the US. Read more
On Thursday, California government Jerry Brown proposed an overhaul to the state’s pension plans for public sector workers that would see the retirement age rise from 55 to 67 and the addition of a 401(k)-style component. While unions reacted negatively to the proposals, the changes in California, if enacted, would follow in the path of 27 state legislatures that have enacted significant pension reforms in 2011, according to the WSJ. The changes would approval from voters as well as the state legislature. If enacted, the state expects to save $4bn to $11bn over the next 30 years. The biggest changes, however, would apply only to new employees. Read more
Following his not-so Grand Tour of Europe, the esteemed vagabond financial scribe Michael Lewis has returned home to report on California for Vanity Fair:
In our opinion, it’s not as perceptive as his articles on Greece or Ireland but it’s still worth an Instapaper click. Read more
Interesting USDA chart, pointed out by Big Picture Agriculture:
Amazon has reported a 51 per cent leap in quarterly sales, hailing its fastest growth in more than a decade but seeing net income slip by 8 per cent to $191m as it defends market share, the FT reports. Most analysts remain confident that the company is right to sacrifice profits in the near term to build up better distribution and data centres for its cloud computing services, Reuters says. Operating profit margin has halved from a year earlier. Rivals say that Amazon is benefiting from an unfair sales tax exemption for most of its customers, although the company is facing challenges in some states. California has just begun collecting a new ‘Amazon tax’, the Orange Country Register reports. Read more
Amazon, the world’s biggest online retailer, has called for a referendum in California on the state’s controversial move to tax online shopping, the FT reports. The online retailer, which is based in Washington state, said on Monday that it would support a referendum on California’s move to require Amazon and other online retailers to collect sales tax from customers in the state. The San Francisco Chronicle says a lobbyist for Amazon has filed a petition with the attorney general’s office to begin the referendum process. Requiring retailers to collect the sales tax is estimated to bring in $200m to the state and the measure was part of the state budget recently signed by governor Jerry Brown. Read more
California is preparing for a round of deep cuts in public spending as the state seeks to address a $9.6bn budget deficit with a new financial plan that does not contain any tax increases, reports the FT. The new budget, which includes $650m of cuts in support for the state’s universities, was agreed by Jerry Brown, California’s governor, and the Democrats who control the state legislature. It was struck just days from the start of the state’s new fiscal year. Bloomberg adds that California lawmakers will begin voting today on the budget, which relies on $4bn in newly projected revenue but needs only Democratic votes to pass. Read more
The Los Angeles Times and the Bond Buyer have done some interesting reporting in the last three weeks, shedding light on a dark corner of the municipal markets: conduit bonds.
What are conduit bonds? Not for the first time, we recommend this post from Bond Girl, which describes how these bonds are different from both vanilla GO bonds issued by governments and from bonds secured by a defined revenue stream, say from a utility. In contrast, conduit bonds are private debts issued by governments or government-sponsored entities. In theory, governments judge that the public gain from the project is greater than the cost in lost tax revenue. Here’s more from Bond Girl: Read more
Comparisons between the peripheral European sovereign bonds and US municipal bonds were ten to the nickel until their fortunes diverged in the last couple of months.
Noting that Greece and California “have been occasionally compared in the business media”, S&P released an updated report on Wednesday examining the two republics’ widening credit outlooks. Read more
For the commute home, where there is often such a thing as too much information, like the government warning on your favourite bottle of scotch,
- US IPO filings reach 2007 levels. Read more
Mad, bad, and dangerous to know — the response from states to the idea of Congress pre-emptively legislating for their bankruptcy.
In Monday’s Wall Street Journal, EJ McMahon of the Manhattan Institute adds to the criticism, arguing that it could distract states from the essential task of pension reform. Read more
Is this how it starts?
The New York Times has splashed on whispers of backroom (mainly Republican) Congressional musings on ways for states to declare bankruptcy — an option not currently open to states under federal law. Read more
Those who believe municipal or state bankruptcy is a clean and simple option may want to take a peek at the city of Vallejo’s proposal to exit court control of its finances. Details from Bloomberg on Wednesday:
The city would pay general unsecured creditors about 5 percent to 20 percent of their claims, according to court papers filed in U.S. Bankruptcy Court in Sacramento, California’s capital. The creditors, who include retirees and former employees, will be paid $6 million over two years, according to the filing. Read more
The $3,000bn US municipal bond market could be on the verge of a crisis to rival that in the eurozone, as cash-strapped states and cities facing big budget and pension deficits struggle to pay their debts, the FT notes, citing the thoughts of prominent market names like Warren Buffett, Jim Chanos and Meredith Whitney. Bloomberg reports that JPMorgan CEO Jamie Dimon also warned on Tuesday that more US municipalities may file for bankruptcy. Meanwhile, FT Alphaville looks at the implications of California’s plans to limit its general obligation bond sales. Read more
California is biding its time in the 2011 municipal bond market.
The LA Times’ Money & Company blog on Monday reported that the state is postponing general obligation bond sales due in the spring until fall 2011: Read more
Jerry Brown, the new governor of California, released his first state budget on Monday and immediately waded into controversy, according to the FT. He plans to cut $12bn from public spending, with higher education and welfare services among the areas in line to suffer. Reuters notes that if lawmakers approve Brown’s budget plan, the California State Treasury would hold back on general obligation (GO) sales — saving the state an estimated $248m — and prepare a $5.76bn GO sale for fall. If the pause on GO sales goes through, it would be the first time since at least 1988 that California, the biggest issuer of US municipal debt, has not sold GO bonds in the spring, Reuters said. Read more
The Securities and Exchange Commission has opened an inquiry into whether the Californian Public Employees’ Retirement System failed to give adequate disclosure of risks in its pension investments, the NYT reports. Calpers, America’s biggest pension fund with $220bn of assets, shed a quarter of the value of its investments during the crisis. The SEC has been studying states’ pension disclosures since an enforcement action against New Jersey last year, concerned over whether weaknesses were hidden from municipal bond buyers. Alongside California, Illinois remains under the spotlight for its poor state finances, the WSJ reports. Its bonds have the widest spreads of any US state. Read more
The state of California on Monday accelerated the timeline and increased the size of a bond sale to $1.25bn as buyers have returned to meet a recent jump in yields in the $2,800bn municipal bond market, reports the FT. But many of those involved in the market remain unconvinced that it had turned after rampant selling last week. Indeed, cash-strapped US states, cities and municipalities face higher borrowing costs after investors withdrew a record $3.1bn from mutual and exchange traded funds last week. Yields on 30-year triple A rated “munis” have risen 50 basis points to 4.36 per cent this month, although they are below the recent high of 4.62 per cent, according to Thomson Reuters MMD. In a positive sign, California, after receiving orders for nearly all of the planned $1bn bond sale following a two-day offering period to retail investors, increased the size of the sale by $250m and advanced the pricing by a day. The state Treasurers’ office also said demand helped the state reduce yields by two to three basis points for most of the maturies on offer. The announced yields range from 1.87 per cent for debt due in 2013 to 5.5 per cent for debt due in 2040, the latter sold only to institutions. Read more
Investors cashed out of the $2,800bn municipal bond market in the last week, withdrawing a record $3.1bn from mutual and exchange traded funds specialising in this type of debt, Lipper, the fund tacker, said late on Thursday. A mass exodus by retail investors has been a concern since they are the primary buyers of “munis,” the FT reports. Unlike corporate bonds, the debt of states, cities and other public entities offers tax breaks, which makes it attractive mostly to wealthy individuals. The troubled state of California, which is borrowing an ambitious $14bn in the capital markets this week and next, lured investors to buy $10bn of notes with higher interest rates. Read more
The state of California on Wednesday said it would restructure upcoming bond issues as it tries to raise $14bn in the middle of a sell-off in the municipal bond market, reports the FT. The decision to shift more of the sale to a government-subsidised market for municipal bonds would lower the cost of the new debt. This follows other local borrowers who have delayed or downsized bond deals in a market downturn that has produced some of the largest one-day rises in yields on “munis” since the height of the financial crisis. Meanwhile the New York Times provides some political background to the Californian crisis. Read more
California will launch about $14bn of debt sales on Monday, in hopes that investors’ search for yield will outweigh concerns over the US state’s fiscal problems in a weak market for local government debt, reports the FT. The move comes amid mounting concerns about a possible rise in defaults or a reassessment of risk in the $2,800bn US municipal bond market. Arnold Schwarzenegger, the state governor whose term ends in January, has called a special session of the legislature to address a state deficit projected to exceed $25bn in the next 18 months. The WSJ meanwhile examines the growing flood of US municipal issuance. Read more
The US recovery began more than a year ago but it has brought little comfort to workers in California and Florida. They are losing jobs as fast as they did at the height of the recession, the FT reports. For the nation as a whole, new jobless claims have fallen from a peak above 600,000 early in 2009 to average about 475,000. But the national figure hides a sharp divergence between rust-belt manufacturing states in the north and east, where unemployment is high but new job losses have fallen, and Sunbelt states in the south and west, where the labour market remains in flux. Read more
We have asked the question before and we will ask it again; what price Betfair, when it lists on the London stock exchange later this month?
Well, if these slides from Numis Securities’ pre-float marketing presentation is anything to go by £1.5bn looks to be the ball park figure. Read more
Democratic politicians in Washington and the Texas attorney general have called on the Department of Justice demanding a freeze on foreclosures on properties, and an investigation into a massive paperwork fiasco, the NYT reports. Then again, other politicians are blaming Congress for passing laws that could help notary fraud, the Times adds. Many of those calling for an investigation are lawmakers from California, Reuters reports — interesting, as Calculated Risk notes that the Californian legal system will largely allow foreclosures continue even as courts elsewhere are gummed up. Read more
California’s ailing state finances have prompted Governor Arnold Schwarzenegger to declare a state of emergency, plus an August pay furlough for public workers, Reuters reports. The state budget faces a $19bn shortfall but lawmakers have delayed passage for more than a month. But investor concern over municipal fiscal problems is easing, the FT reports, with muni bond yields approaching record lows. Nassim Taleb for one doesn’t trust government deficits, describing them as a ‘pure Ponzi scheme’ during an interview with Bloomberg BusinessWeek. Read more
Here is an arresting graphic (click to enlarge):
California, the largest issuer of state debt in the US, said on Thursday it would require the 86 firms that underwrite its bond sales to report quarterly with details on their activity in credit default swaps, reported the FT. The move could potentially lift the veil on a largely unregulated market. The salvo comes as the derivatives industry has come under scrutiny for fuelling not just the financial crisis of 2008, but recent bouts of distress such as the Greek debt crisis. Last week, the Securities and Exchange Commission charged Goldman Sachs with fraud related to a complex transaction involving CDS. Read more
It was only a matter of time. California — following in the footsteps of Ireland and Iceland, Greece, Spain, and politicians of all stripes and nationalities — has called for an examination of credit default swaps sold against its bonds.
As Reuters reported: Read more
California’s state treasurer has asked six major investment banks to explain why they provide credit default swaps on bonds they underwrite for the state, Bloomberg said. Bill Lockyer argued that the swaps could harm taxpayers by exaggerating risk. At least 415 such swaps are traded on bonds issued by California, the lowest-rated US state. Read more