Every now and then, The New York Times takes a big ol’ swipe at derivatives for being evil and whatnot. That’s fine and well — and sometimes obligatory, particularly when it comes to certain structured products for which it’s hard to discern the benefit to anyone outside of a bank.
But it can all go awry when someone starts arguing against derivatives and just gets it wrong. It makes us do a sad, frowny face
and then get incredibly frustrated. Read more
Pity the municipal middle man.
Wednesday’s WSJ has an interesting article on covenants that banks are attaching to direct loans made to municipalities seeking refuge from the capital markets. (The Bond Buyer reported back in February on the move toward direct lending.) Read more
On Friday S&P stressed its March 29 five-notch downgrade of the GO and appropriation-backed debts of DeKalb County, Georgia was “not the canary in the coal mine, but more the anomaly”.
But in a municipal market report also out on Friday, Citi is more sceptical about the nature of the proverbial bird and what it means for other US local governments and the credit outlook for some munis. Read more
Do you want the good news or the bad news first?
Good news, really? Fine then. Read more
Municipal bonds, doctor doom will see you now.
The WSJ reports Wednesday that Roubini Global Economics analysts David Nowakowski and Prajakta Bhide estimate there will be about $100bn of muni bond “defaults” over the next five years. Read more
Another day, another report of municipal bond outflows from mutual funds. From Reuters on Wednesday:
The mass exodus of cash from municipal bonds accelerated to a record outflow of an estimated $5.7 billion in the week ended Jan. 19, data from the Investment Company Institute showed on Wednesday. The redemptions are the most in any week since the ICI, a U.S. mutual fund industry trade group, started tracking weekly investment flows at the start of 2007. 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
What’s good enough for GM is apparently good enough for California and Illinois.
That’s the argument made by University of Pennsylvania law professor David Skeel in an op-ed in Tuesday’s WSJ: Read more
Sign-of-the-times news from the municipal bond world on Thursday (report from Reuters):
Vanguard Group canceled plans to open a line of tax-exempt bond exchange-traded funds as municipal bond prices tumbled and index tracking concerns hit competitors’ ETFs. 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
The fiscal situation for US cities is the worst it has been in at least 25 years and the problems are intensifying, research released on Wednesday shows, the FT reports. The National League of Cities, which surveyed finance officers in 338 cities, found that property tax revenues are just beginning to decline in what was an anticipated, but delayed response to the collapse of the real estate market in the last few years. Read more
Bill Lockyer, trendsetter. Back in March, the California treasurer sent a letter to six Wall Street banks asking, effectively, whether they’d ever traded credit default swaps written on the state’s debt.
The result of that CDS inquisition: nothing to see there. As the FT reported in April: Read more
On Wednesday, the mayor of Harrisburg — the capital of Pennsylvania, for those not au fait with US municipal geography — appeared on CNBC to discuss the gaping hole in the city’s finances.
The NY Times has detailed how Harrisburg torched its budget: Read more
Council meetings in Harrisburg, the capital of Pennsylvania, have weighed issues ranging from snow removal to a rise in dog fighting, but a meeting this week was particularly unusual. In a sign of the tough times, officials called in experts to discuss the pros and cons of going bankrupt, the FT says. With cities, towns and counties across the US hard hit by the recession, local officials, investors and analysts are questioning whether bankruptcy could become more common. Read more
Treasurers in US towns, cities and states have been angered by the rising attention of credit derivatives markets, the WSJ reports. Municipal credit default swaps have become popular as doubts grow over local governments’ abilities to raise revenue after the recession — but face a regulatory backlash in the financial reform bill currently passing through the Senate. Read more
Risk — the magazine that first reported the story of Goldman’s Trojan currency swaps — has done some digging into how the Latvian capital of Riga managed to “lay their hands on spending money without reporting it as debt”:
When the Latvian government told Riga it couldn’t borrow the equivalent of $1 billion to build a bridge over the river Daugava in 2005, Deutsche Bank stepped in. Its solution – enhanced vendor financing (EVF) – would provide the money in a series of payments, allow the city a five-year grace period before repayments start this year and not need to be reported as debt, the bank claimed. The downside was the expense: 46% of the total 567 million lati bill for the bridge was interest. 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
Some excellent reporting from Bloomberg on the side effects of Ambac’s part-seizure by its regulator – and for once, for the story has nothing to do with credit default swaps.
Here’s Bloomberg: Read more
Employees of Deutsche Bank, Deloitte Touche Tohmatsu and Banca Italease may face charges in Milan related to an ongoing investigation into derivative sales. Deutsche, which reiterated its trust in the integrity of its employees in an emailed statement, is already facing separate charges in Milan, alongside UBS, JP Morgan and Depfa. Nor can Deloitte, which declined to comment, be relishing accusations of false accounting, FT Alphaville said. Read more
Documents filed in a US Justice Department criminal antitrust case have named JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and UBS AG among banks involved in a ‘conspiracy’ to pay below-market interest rates to US state and local governments on investments, reports Bloomberg on Friday. Altogether, the government list of previously unidentified “co- conspirators” names more than two dozen bankers at firms also including Bank of America Corp., Bear Stearns Cos., Societe Generale, and two of General Electric Co.’s financial businesses. The document is said to provide the broadest look yet at alleged collusion in the $2,800bn municipal securities market. For more, see FT Alphaville. Read more
Wall Street must be wondering whether the returns on selling derivatives to municipalities (and say, Greece) are really worth the headache.
In the latest development in the saga of investment banks v munis in re derivatives, a judge ruled on Thursday that a dozen financial institutions will have to defend themselves against allegations of bid rigging and price fixing in the market for municipal derivatives. Read more
How do you get a $295m loan from a Chinese bank? FT Alphaville reports you need to be either a local government investment vehicle, or own one. Say you will use the loan for a high-profile investment. Or simply proceed to use the money for something else. Read more
Another day, another round of investment banks getting it in the neck over derivatives.
On Wednesday, an Italian judge ordered JP Morgan, UBS, Deutsche and Depfa to stand trial on charges related to a 2005 deal involving Milan and a €1.7bn bond issue. Read more
Turns out, sovereigns are not the only public bodies with a love of currency swaps.
Bloomberg reported on Wednesday that Italian municipalities are increasingly under domestic pressure over their prevalent use of derivatives in the last few years. Read more
Not quite what you might expect from an FT Alphaville post, but the following report from the LA Times on the imminent closure of Philadelphia’s libraries illustrates some of the oft-overlooked human consequences of the fiscal crises faced by many US states and municipalities (see, for instance California and Jefferson County, Alabama).
From the report by the LA Times Jacket Copy blog: Read more