The market no longer believes in the business of insuring municipal bonds.
Ambac has gotten more serious about its months-long threat to file for bankruptcy, today going so far as to miss an interest payment to its creditors and say in a regulatory filing that it's seeking a "restructuring of its outstanding debt through a prepackaged bankruptcy proceeding." My colleague Colin Barr has a good breakdown of the company's financial troubles here.
Ambac's troubles are more than just the woes of one company. That the bond insurer has been unable to "raise additional capital as an alternative to seeking bankruptcy protection," as it says in its filing, indicates that investors are ready to let Ambac, and the bond insurance industry, go to seed.
"This is an industry in its death throes," says Ed Grebeck, the chief executive of debt strategy firm Tempus Advisors, and an adjunct professor at New York University. Grebeck says to look no further than Assured Guaranty (AGO), the only bond insurer left standing. With the flood of muni debt that his hit the market, "you would expect the only guarantor left standing to be printing money, but it has not," Grebeck says.
First, the business model treats credit like insurance, meaning that it looks at historical statistics and tries to look at credit as a series of probabilities. While this can work up to a point, we learned in 2008 that when things fall apart, statistics are all meaningless and credit quality becomes a behavioral phenomenon. Since credit becomes a behavioral issue just when you need coverage the most, it's unlikely that a muni bond insurer could hold enough capital to cover its defaults and still be a profitable enough insurance company to attract investors.
Second, Grebeck says that bond insurance was predicated on the idea that municipalities would never actually default, but restructure and raise taxes instead. So muni bond insurers collected premiums but never had to pay out, becoming the golden goose of the insurance world. But now it seems we're entering a whole new world with regards to public finance as localities start to face up to huge underfunded pensions while retirees pile up. "It's going to be hard for the government to bail out those places that do decide they just can't pay, as they did with New York, because too many places are strained," says Grebeck. "The government can't afford to bail out all of these places, so they won't help any. The moral hazard would be too great."
Quote from Imerson :
I don't think experience really matters for a president. My point is that you can't really use his own words from 4 years ago against him.
1.20.2009 - The end of one error, and the beginning of another
The bottom line is that the county is bankrupt because JP Morgan kept bribing county officials to sign ever more stupid agreements.
And the thieve will continue their heist, whilst scapegoats are made and curtains drawn.
Quote from cruizerfish :
Nope, they know exactly what they are doing.
Many of the people are in on the con$, though there's room for various bandwagons. Some are in it for the money, others fall for the plays on fear and provide the predictable knee-jerk reactions ready for exploitation, and others have a real ideology at play.
Last edited by SiliconJon; 11-01-2010 at 02:48 PM..
Reason: Automerged Doublepost
Second, Grebeck says that bond insurance was predicated on the idea that municipalities would never actually default, but restructure and raise taxes instead. So muni bond insurers collected premiums but never had to pay out, becoming the golden goose of the insurance world. But now it seems we're entering a whole new world with regards to public finance as localities start to face up to huge underfunded pensions while retirees pile up.
An entire industry that survives by collecting fees that they had no intention of ever paying out.... Good riddance... this corporate welfare needs to stop...
We differ in a lot of opinions, but that sure sounds like "Our business model was based on never paying out a dime"....
assuming that municipalities don't default. I think no one thought that was possible, but in 2007, no one thought the collapse in housing we see today was possible either.
If anything, we saw that it is in fact possible, and now these companies are losing their shirts. Doesn't sound like corporate welfare to me, just a bad case of hubris and belief in the infallibility of government. If those companies didn't price in the fact that pension obligations were underfunded, well that's their problem.
I might see your point if the government was there to bail these companies out in case they did have to actually pay claims.
NEW YORK (CNNMoney) -- The city council of Harrisburg, Pennsylvania, voted to file for bankruptcy protection Tuesday night.
But the mayor of the state's capital, as well as the governor and a state senator, quickly called the action illegal. State law prohibits the city from filing for bankruptcy, they said.
"Rather than wasting precious time on illegal filings and engaging expensive attorneys, the majority of city council should be...working with the mayor and the commonwealth to resolve this crisis," said State Senator Jeffrey Piccola.
But the council's attorney, who filed the documents in federal court in Harrisburg Tuesday night, said the council does have the power to file for bankruptcy. Mark Schwartz argued that the state law has "lots of problems," citing a section that says if a city does seek bankruptcy protection, it will lose its state aid. That implies a city can file, he said.
City Council President Gloria Martin-Roberts did not return calls seeking comment. The vote was 4 to 3 in favor of the bankruptcy.
The mayor, who took office last year, has strongly opposed bankruptcy, calling it an option of last resort.
Thompson has turned to the state for help several times. A year ago the Pennsylvania state government gave the city $4.3 million to help stave off a bankruptcy threat at that time. The mayor also petitioned the state last year to enter its distressed municipalities program, known as Act 47, which prompted a state consultant to come up with a recovery plan.
However, the city council this summer rejected the state's plan, as well as a similar proposal drawn up by the mayor.
Despite that rejection, Thompson is moving ahead with her proposal, which calls for selling the incinerator and leasing the city's public parking lots. Those measures, along with some consolidation of city departments and givebacks from city employee unions, should put Harrisburg back on sound financial footing in two years or so, Philbin said. Offers to buy the incinerator have come in as high as $150 million.
Most of its financial troubles can be traced to the city’s incinerator.
Officially called the Harrisburg Resource Recovery Facility, the incinerator converts trash into power. But over the years what it's done best is burn cash.
"There's nothing in the industry that even reflects the kind of financial structure that this facility is in," says Jim Klecko, a regional vice president for Covanta Energy – the company under contract to operate the facility.
While many of the nation's incinerators are nearly paid off, the one in Harrisburg is roughly $300 million in the hole. It's the result of years of bad decisions and bad luck. Klecko says the facility is working better now than it ever has, even operating at a profit. That is, if the debt is not calculated in.
"If you ran at peak efficiency, 100 percent all of the time, just by pure volume, you couldn't process that much waste in a facility of this size to make their debt service," he says.
The total debt service owed this year by the Harrisburg Authority, which owns all of the city's utilities, is $68 million. But the Authority has been missing incinerator debt payments left and right. So the responsibility falls to the city of Harrisburg, which backed the bonds. Problem is — the city can't handle the bills either. It's already missed a couple of payments this year.
"Bankruptcy sounds bad, but when you are insolvent, when you have very few options, this may actually be the best option," says Dan Miller, the city controller.
Miller says that $68 million bill for the incinerator is more than the entire city general fund budget.
don't even get me started.. There are so many behind the scene issue that go on and many stem from this mayor's plain stupidity.
dressed pretty well for a mayor of a city facing Bankruptcy..
last week she asked for a professional digital camera and a full time photographer because.. people regularly wanted to have their picture taken with her.. b/c her being the first African American mayor of Harrisburg is historic.
When people were protesting her and demanding her to resign.. the took footage of her essentially mocking the crowd from the window and pointing to the ground mouthing "I'm not going anywhere". Pictures of her giving the thumbs down to a couple hundred protestors gathering for her resignation.
^ how you deal w/ protestors in a Rally called: "Show Your Love for Harrisburg; Demand Linda Thompson Resign"
Why is she so against this bankruptcy? b/c it basically takes all power away from her.. and honestly I think the city council looked at that as an incentive to go w/ Ch 9. Most stated that the Chapter 9 would cause far less damage to the city than upping taxes till the city become "a virtual ghost town". Problem being that the city of Harrisburg doesn't have well off people living there. Everyone commutes to work in the city and lives beyond the "city lines". So what did they want to do? a Commuter tax.. 3% tax for the privilege of working in the city.
The Securities and Exchange Commission has sued the city of Harrisburg for fraud, alleging that officials in the Pennsylvania capital misled the public about the city's financial condition.
The SEC says the misleading statements came in the city's 2009 budget report, its annual and mid-year financial statements and a "State of the City" address. The case marks the first time the SEC has charged a municipality with misleading investors in statements made outside of securities documents.
"In an information vacuum caused by Harrisburg's failure to provide accurate information about its deteriorating financial condition, municipal investors had to rely on other public statements misrepresenting city finances," the SEC's George Canellos said in a statement.
Escaping the largest U.S. municipal failure could leave Jefferson County, Ala., in an even deeper hole.
The county's plan to emerge from bankruptcy protection hinges in part on the sale of $1.9 billion of new debt this fall to refinance debt tied to its troubled sewer system. But some observers call terms of the new debt onerous.
The proposal for the refinancing, which has been approved by a majority of county commissioners, includes a set of bonds that schedule larger debt payments in the later years of the financing. About $474 million are a type of debt called capital-appreciation bonds. Such bonds have been derided by California's treasurer as "terrible" for their backloaded payments, and Michigan has banned their sale by municipalities.
All told, Jefferson County taxpayers would stand to repay nearly $6.9 billion over the four-decade term of the financing, more than three times the amount the county initially plans to borrow. That is perhaps billions more than they would pay under a plan whose payments would be more evenly distributed, said a potential investor.
With capital-appreciation bonds, buyers agree to forgo regular interest payments in favor of receiving accreted payments near the end of the bond's maturity. The bonds were designed to help rapidly growing areas in states such as Texas and Florida where school districts need to borrow money fast to expand their campuses, but they want to make sure future residents share in the cost burden.
Unions that have propagated the conceit that pensions are inviolable are stunned to discover that they may have been wrong. Meanwhile, investors appear astonished that there's no such thing as a risk-free return, which they should have learned from Greece and Argentina. One question to ask now is if Detroit isn't too big to fail, is any city?
While few municipalities are as economically depressed or dilapidated as Detroit, many have borrowed heavily, raised taxes and hollowed out services to pay retirement and debt obligations. Some like Detroit may soon decide that clipping bondholders and pensioners is a better option than to keep whacking taxpayers.
Take Oakland, which is Detroit's doppelganger on the West Coast. The run-down Bay Area city, which has the highest crime rate in California, recently laid off more than 100 police to fund retirement benefits and pension-obligation bonds. Murders and robberies shot up by nearly 25% last year. To avert steeper cuts, the city borrowed an additional $210 million to finance pensions.
Philadelphia and Chicago have been less scrupulous about financing pensions and are now having to make balloon payments to prevent their retirement funds from going broke. Philadelphia is spending about 20% of its budget on pensions to make up for years of short-changing the system. In 1999, it issued $1.3 billion in bonds to invest in the pension fund, but it has paid more in interest than it has earned on its pension investments.
Chicago is also fast approaching a day of reckoning. Chicago Public Schools last week announced 2,100 layoffs, which Mayor Rahm Emanuel blamed on a $400 million spike in pension payments. "The pension crisis is no longer around the corner," he said. "It has arrived at our schools."
One of the benefits of bankruptcy is that it allows debtors to shed liabilities that impede growth and investment. That benefit must be weighed against the cost of being frozen out of bond markets, which might be a good thing if it prevents more borrowing to finance unsustainable costs.
In Detroit, unions and creditors helped to perpetuate a borrow-tax-spend cycle at the expense of city residents. Bankruptcy shows the party is over, as it may also soon be for many other cities.
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