Financial innovation gets kind of a bad rap, and one of my favorite parts of this job is when I get to celebrate it just for being itself. Sometimes this means breathtaking magic like the derivative on its derivatives that Credit Suisse sold to itself, or elegant executions of classic ideas like the Coke shares that SunTrust sold for regulatory purposes but not for tax purposes. Other times it’s a more prosaic combination of already-existing building blocks to allow people who were comfortably doing something to keep comfortably doing it in the face of regulations designed to make it more uncomfortable.
Yesterday a reader pointed me to a Bond Buyer article that, while perhaps neither all that scandalous nor all that beautiful, is sort of cozy. It’s about a new issue of callable commercial paper issued by a Florida municipal financing commission, and here’s the joke:
JPMorgan came up with the new product as a solution for variable-rate municipal issuers facing impending Basel III regulatory problems. The proposed regulations would require banks to have a certain higher value of highly liquid assets to be available to turn into cash to meet liquidity commitments that could be drawn within 30 days. Maintaining higher liquidity would be expensive for banks, which may try to pass on costs to its issuers, according to an analyst at Moody’s Investors Service. “What we did, starting over a year ago, is ask what we can do to change the product that will still work for all the players, including issuers, investors, and the rating agencies,” Lansing said. “And the ultimate result was this product.” The new product allows banks to continue to support variable-rate products after the regulations are implemented. The paper has a variable length of maturity, but always at least 30 days. Several days before the paper would have 30 days left to its maturity, the issuer calls the paper.
The joke isn’t that funny, though I giggled at the phrase “a solution for variable-rate municipal issuers facing impending Basel III regulatory problems.” Municipal issuers face no Basel III problems: municipalities are not subject to Basel III. Read more »
New Jersey’s move to take out a short-term $2.25 billion loan to pay its bills is symbolic of how difficult state and municipal financing will be in the year ahead, analyst Meredith Whitney told CNBC Tuesday…she said these types of moves will be mere warning shots as states approve their spending plans for the fiscal year ahead—running from July 1 to June 30—and balance those budgets by cutting local aid. “That’s what’s really going to hurt. So the pain of the states is just upon us,” said Whitney. “What you’ll see now is as the states are submitting final budgets, you’ll see the real pain at the municipal level start happening July 1. That will intensify and that’s where you’ll see the fallout.”"That’s what’s really going to hurt. So the pain of the states is just upon us,” said Whitney. “What you’ll see now is as the states are submitting final budgets, you’ll see the real pain at the municipal level start happening July 1. That will intensify and that’s where you’ll see the fallout.” [CNBC]
Last fall, Meredith Whitney made a prediction. Perhaps you remember it? It was part of a report called “Tragedy of the Commons,” wherein the analyst said that there would be “hundreds of billions of dollars’ worth” of municipal-bond defaults a’ coming. While some agreed with her, a vocal contingent did not. Charlie Gasparino, for instance, said that in his infinite wisdom, Whitney’s call suggested she “had been lobotomized.” Now, after several months and dozens of calls to the cops to request they remove Chaz, standing on her lawn yelling “Show me your books, Whitney!”, does MW stand by her analysis? You bet your ass she does and you what to know another thing? She welcomes the haters. Read more »
“I think her general sense was correct,” he said this morning on Squawk Box. “You weren’t getting compensated for the risk as an investor and that’s an important call and that’s something people need to hear from time to time.” [CNBC]
This much they promise you. Read more »
You can count the Center on Budget and Policy Priorities on Team Lebenthal. Read more »
Alexandra & James, the Lebenthal’s family wealth advisory business, continues to recommend that its clients buy munis. There are some cities and states which the firm avoids, but Lebenthal continues to recommend double-A and triple-A bonds. Investors should not sell, she added, regardless of Whitney’s warnings.”I don’t dispute her knowledge of the investment banks, but she is not a municipal bond expert,” Lebenthal said. “I would put any muni analyst in a room with her — on TV, outside in the school yard — and see who comes out ahead.” [Reuters via BI]
Mark Zaino, a former UBS trader who worked on the firm’s derivatives and municipal securities desk, pleaded guilty to fraud and conspiracy charges today in the wide-ranging investigation into sham auctions and bid rigging in financial products sold to municipalities.
Zaino is the first banker to plead guilty to charges and he has agreed to cooperate with investigators. Another banker at Bank of America, who participated in the massive bid-rigging scheme, is also providing information to the Feds about the scam. Read more »
If you thought the SEC’s charges against Goldman Sachs poured fuel on an already-raging populace fire, Wall Street’s involvement in a massive bid rigging scandal in the $2.8 trillion municipal bond market will fan the flames even more.
Earlier this month, we heard about an SEC investigation of conflicts of interest at big banks that bought credit default swaps on muni bonds they sold to state and local governments. But Bloomberg is out with a big investigative piece today about a massive bid-rigging scandal in the muni market that, if true, bilked 160 state agencies, local governments and non-profits out of hundreds of millions of dollars. Read more »
With tax receipts down and unemployment up. the brave souls at Ambac tried to pick now as an opportunistic time to launch Everspan Financial Guarantee Corp,, a bond insurer focused on wrapping municipal and public purpose debt. While Ambac thought feel good fiscal stories like the ones playing out in California would entice investors to fund their well timed venture, the lack of people willing to burn money at this stage has put the project on hold.
Ambac Delays Launch of Muni Unit [WSJ]
A few months ago, we beat up a couple of Portfolio writers on the subject of municipal bond insurance until it got so easy we started to feel bad for them. Their contention was that bond insurance was a scam perpetrated by a conspiracy of investment bankers, ratings agencies and insurance companies. We argued that bond insurance persisted because of genuine market demand for lower risk investments.
At the heart of the Portfolio position, however, was a genuinely important insight: municipal bond default rates were so low that insuring the bonds seems irrational. Do you really need to purchase insurance for a class of bonds that have a 0.5% historical default rate?
An article by one of favorite New York Times writers, John Tierney, points out that irrationally insuring against small risks is not confined to muni bonds. “We buy insurance not just for peace of mind or to protect ourselves financially, but because we share the ancient Greeks’ instinct for appeasing the gods,” he writes.
Read more »