Hey State and Local Governments, Don't Count on Bernanke as a Lifeline

The Wall Street Journal
By Jon Hilsenrath and
Neil King Jr.
1/8/2011

Federal Reserve Chairman Ben Bernanke on Friday ruled out a central bank bailout of state and local governments strapped with big municipal debt burdens, saying the Fed had limited legal authority to help and little will to use that authority.

"We have no expectation or intention to get involved in state and local finance," Mr. Bernanke said in testimony before the Senate Budget Committee. The states, he said later, "should not expect loans from the Fed."

The $2.9 trillion municipal-bond market has been stung recently by worries that some cash-strapped cities or states won't be able to pay off or roll over debt. Costs have risen broadly for municipal borrowers. The market also faces challenges from the expiration of the Build America Bonds program, which helped cities and states borrow $165 billion at interest rates held down by federal subsidies.

Some analysts speculate the Fed could jump into the market by purchasing muni debt or lending to struggling borrowers.

The Fed only has legal authority to buy muni debt with maturities of six months or less that is directly backed by tax or other assured revenue, which makes up less than 2% of the overall market. The Dodd-Frank financial-regulation law enacted last year further tied the Fed's hands, Mr. Bernanke noted, by barring the central bank from lending to insolvent borrowers or pursuing bailouts of individual borrowers.

Mr. Bernanke played down the risk of a major municipal-bond crisis, noting that muni markets have been functioning normally, with healthy trading volumes and lots of issuance. But he said that if municipal defaults did become a problem, it would be in Congress's hands, not his.

"This is really a political, fiscal issue," he said.

Lawmakers also are drawing a line in the sand. Senior House Republicans say they will oppose any state requests for money. "If we bail out one state, then all of the debt of all of the states is almost explicitly put on the books of the federal government," House Budget Committee Chairman Paul Ryan said Thursday.

At least three House committees are planning hearings on local budget woes. Rep. Devin Nunes (R., Calif.) plans to introduce a bill to require states to disclose the size of their public-pension obligations in order to keep their federal tax-exempt bonding authority.

The bill, the Public Employee Pension Transparency Act, will explicitly bar state and local governments from receiving help from the federal government to cover their pension obligations.

"There are 242 Republicans, and I can't imagine one that would be in favor of a bailout," Mr. Nunes said.

Many Democrats are wary as well. "We need to be prepared with a plan in case we are approached by one or more states," said Sen. Kent Conrad, (D., N.D.), chairman of the Budget Committee. Neither the House nor the Senate would be "very interested in bailouts to states," he added.

In 2010, there were five municipal bankruptcy filings, down from 10 filings in 2009, according to a recent report from Bank of America Merrill Lynch. Through Dec. 1, there was $4.25 billion of municipal debt in default, which represents 0.15% of the total market, the report said.

On a recent broadcast of CBS's "60 Minutes," Meredith Whitney, a banking analyst who recently turned to analyzing state and local finances, said the U.S. could see "50 to 100 sizable defaults," in 2011 amounting to "hundreds of billions of dollars."

Mr. Bernanke described that as a "pessimistic view" that he didn't entirely agree with.

No states rated by Moody’s will default this year...Promise, cross my heart and...

Moody's, the very same rating agency that continued to rate residential CDO's AAA even though they were infested with subprime toxic waste. Let's travel back to April 2010, when a couple of Moody's best and brightest testified before a Congressional subcommittee regarding their role in our overall mortgage mess:

Eric Kolchinsky, who was in charge of the Moody's unit that rated subprime collateralized debt obligations (CDO’s):

• “people across the financial food chain, from the mortgage broker to the CDO banker, were compensated based on quantity rather than quality".
• "The situation was no different at the rating agencies."“I believed that to assign new ratings based on assumptions which I knew to be wrong would constitute securities fraud”

Raymond McDaniel, chairman and chief executive of Moody’s

• "We, like many others, did not anticipate the unprecedented confluence of forces that drove the unusually poor performance of subprime mortgages in the past several years".
• Moody's "is certainly not satisfied with the performance of our ratings during the unprecedented market downturn of the past two years."

Yes America, this same crack team of experts expresses their opinion on Municipal Debt Defaults.

No states rated by Moody’s will default this year

(sleep well)

By Martin Z. Braun

Jan. 6 (Bloomberg) -- U.S. municipal governments, facing more than $100 billion in budget deficits this year and the expiration of federal stimulus funds, will be able to weather lower demand for debt and increased borrowing costs, Moody’s Investors Service said.

No states rated by Moody’s will default this year, although a few local governments may miss payments, the company said in a report. Few U.S. municipal governments borrow to fund short-term operating needs, the rating company said.

“Most municipal debt is used to finance capital projects, and governments have the ability to defer projects if they cannot finance them at rates that make sense,” said Moody’s analyst Naomi Richman. “Even many issuers of short-term cash- flow notes could draw down their available cash reserves.”

The $2.8 trillion municipal bond market has been buffeted in the past three months by predictions of mass defaults and a rush to issue federally subsidized Build America Bonds before it expired on Dec. 31. Banking analyst Meredith Whitney said she expected 50 to 100 “significant” municipal bond defaults in 2011 totaling “hundreds of billions.”

Whitney, who correctly predicted Citigroup Inc.’s dividend cut in 2008, has written a 600-page report on the financial health of the 15 largest states, which hasn’t been released publicly. She is applying to the U.S. Securities and Exchange Commission to start a ratings firm to compete with Moody’s and Standard & Poor’s, saying the companies lost credibility when billions of mortgage-backed securities they rated AAA were later downgraded to junk.

In a default study published last year, Moody’s found 54 defaults in municipal issuers it rated from 1970 to 2009. Only three were general governmental defaults. In 2010, $2.52 billion of municipal bonds defaulted, compared with $14.5 billion of corporate bonds, according to Distressed Debt Securities Newsletter. There were no defaults in 2010 by state or local governments rated by Moody’s. More Martin B. Braun Articles

Jim Grant interview with Henry Blodget

Jim Grant, one of the country's premier financial analysts and historians, has had a front row seat on Wall Street for more than three decades. Unlike most people who work on Wall Street, moreover, Jim actually works on Wall Street: His office is right across the Stock Exchange.

A former Barron's staff writer, Jim founded the beloved Grant's Interest Rate Observer close to 30 years ago. Even in an age of 24/7 online news, the publication remains one of the leading authorities on debt, bonds, Japan and the economy.

Jim has a stuffed bear in his office and a sinking-Titanic paperweight on his desk. We sat down with him recently for an exclusive interview to discuss an array of issues, including a possible bond bubble, the state of the union, and the economy.

Watch below the full half-an-hour interview. We'll be publishing highlights from it over the next few days.

This interview is part of our Inspiring Performers series, presented with limited commercial interruption.

Build America Bonds to cost the federal government (a.k.a. taxpayers) $36 billion through 2019

By Esmé E. Deprez

Aug. 20 (Bloomberg) -- Build America Bonds, the fastest- growing part of the $2.8 trillion municipal debt market, will cost the federal government $36 billion through 2019, $6 billion more than forecast, the Congressional Budget Office said.

The U.S. subsidizes 35 percent of the interest cost of the taxable Build America securities, which were authorized under the economic stimulus legislation signed by President Barack Obama last year. Issuers have sold about $128.5 billion of the debt, according to data compiled by Bloomberg.

Federal spending on Build Americas will rise to $2 billion for the 2010 fiscal year ending Sept. 30, from less than $500 million in 2009, the non-partisan agency said yesterday in its semi-annual budget report. From 2009 to 2019, the total cost will grow to $36 billion, up from a $30 billion estimate in January. The Bond Buyer newspaper reported the findings earlier.

According to the CBO’s March analysis of Obama’s fiscal 2011 budget, his plan to expand and permanently extend the program -- as well as lower the subsidy to 28 percent -- would increase revenue by $80 billion over the 2011-2020 period. More than two-thirds of the Build America program’s cost is currently offset by higher tax revenue, according to the CBO.

The House of Representatives postponed on July 29 a vote to extend the Build America program for two years beyond its Dec. 31 expiration. Two previous extensions sought by the House were killed in the Senate.

Independent researcher CreditSights Inc. forecast on July 29 that total issuance would reach $165 billion by year-end, as borrowers come to market before the program is set to cease.

Build Americas yield about 5.63 percent on average, according to the Wells Fargo Build America Bond index. The index has an average maturity of 28.8 years and an average credit rating of Aa3 and AA- from Moody’s and Standard and Poor's, respectively. Both ratings are the fourth-highest investment grades.

Grandpa

Build America Bonds is synonymous with Build American Banks...the U.S. government continues to afford the Wall Street Banks with unbelievably profitable income producing opportunities while the U.S. taxpayer continues to struggle and our children and grandchildren are left with the financial shortfall. The following article albeit 5 months old, remains relevant.

CBO projects a $36 billion hit to the federal government while Goldman Sachs booked $55.7 million of Build America Bond fees as of March 2010.

By Michael McDonald
March 10 (Bloomberg) -- Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, has made $55.7 million from the sale of $36.4 billion of Build America Bonds, about a third of the fees it earned from its municipal business, it said in response to queries from Iowa Senator Charles Grassley.

The effort to underwrite the federally subsidized municipal bonds is “highly competitive” with “over 10 major firms” vying for the business, Goldman Chairman Lloyd Blankfein wrote in a letter dated March 1 to the top Republican on the U.S. Senate Finance Committee. Grassley said in a letter to Blankfein last month that he is “concerned that American taxpayers are subsidizing larger underwriting fees for Wall Street investment banks.”

Congress created the Build America Bond program last year as part of the $862 billion American Recovery and Reinvestment Act in an effort to revive the $2.8 trillion municipal bond market. The U.S. Treasury pays 35 percent of the interest cost if states and local governments sell the taxable securities for their capital projects instead of tax-exempt debt.

Goldman, which got $10 billion in taxpayer bailout money amid the credit crisis in 2008, was paid $54 million to lead underwrite or help sell $34 billion of the bonds and $1.7 million to serve as an adviser on a separate $2.4 billion of Build America Bond sales, the bank told Grassley’s office in a second communication dated March 9. Jill Gerber, a Grassley spokeswoman, confirmed the content of the letters.

Borrowers Paid More

Blankfein replied to Grassley that the bank is paid to “educate the market about the issuer and the securities they are offering,” as well as “assume the risk of underwriting.” He said that as Build America Bonds “have become better known to investors, underwriting fees have come down.”

The bonds are marketed to investors that typically don’t buy municipal securities because they don’t need tax-exempt income.

Goldman’s Fees

Goldman charges a fee of between 0.6 percent and 0.875 percent of the borrowed amount of money to underwrite Build America Bonds, compared with 0.875 percent for investment-grade corporate bonds and 0.5 percent to 0.625 percent for tax-exempt municipal securities, Blankfein said. Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment further.

The bank earned a total of $149.7 million underwriting and advising on the sale of municipal securities, including Build America Bonds, since the beginning of last year, according to information it provided Grassley’s office. It generated $885 million in revenue from underwriting all types of debt in the final nine months of 2009, or 2.5 percent of the firm’s $35.75 billion in total net revenue in the April through December period, according to company filings.

President Barack Obama last month proposed extending and expanding the program, which expires at the end of this year. There have been $84 billion of the securities sold since last April, according to data compiled by Bloomberg.

Goldman Sachs, which paid back the bailout last year, was the top underwriter as of Dec. 31 for debt issued under the stimulus program, followed by banks including JPMorgan Chase & Co., Bank of America Corp., Morgan Stanley, Citigroup Inc. and Barclays Plc, according to data compiled by Thomson Reuters. Goldman Sachs led a group selling $2.6 billion of securities for Georgia’s Municipal Electric Authority this month.