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BABS are a Cali Subsidy
The Build America Bond program will be a topic of discussion today when
Obama meets with Congressional Republicans. Like the Bush tax cuts the
enabling legislation for BABS is set to expire in a month. I don’t
think the BABs extension is going to meet with any opposition. While it
is a side show to the tax issue; BABs is probably more important. If it
isn't extended there is going to be a blowout in the tax-exempt Muni
market. Should that happen you can kiss off any hopes of extending the
economic recovery. Failure to extend BABs would trigger a (new) fiscal
crisis for California. That would quickly spread to a few other key
states.
BABs are taxable securities that offer municipal/state issuers a 35%
subsidy on interest costs. The subsidy was supposed to be revenue
neutral at the federal level. The theory was that the average tax
revenue would be close to the 35% paid out. It hasn’t worked like that.
The BABs bonds paid a nice yield and were gobbled by investors whose tax
rate was closer to zero than the 35%. So the cost falls on the
taxpayers and adds to the deficit. So which states are lining up deals
that are fleecing federal taxpayers? Mostly Dead Beats (excluding
Texas).
BABs
creates a tax arbitrage at the expense of taxpayers and to the benefit
of (largely tax exempt) investors. The subsidy works. It allows states
to pay up in yield while at the same time achieve a net interest cost
that that is acceptable. The WSJ had this to say about a Cali BABs deal last week:
The
BABs were said to have attracted twice as many bids as the amount on
offer, even after the state increased the size of the deal by $525
million because of the strong investor demand.
This comment from the California Treasurer’s spokesman says it all:
"California's struggling? Hardly. We're not struggling. We're succeeding.
We're doing a job that's vital to California's fiscal and economic
health, and doing it at the best possible price for taxpayers."
If you were a taxpayer in Cali this statement would probably be
accurate. But federal taxpayers are being bled to death in support of
Cali.
How important is the BABs program to the stability of municipal finances
in America? What might happen should Washington fail to pass an
extension that keeps the window open a bit longer? Consider this comment
from the Bond Buyer:
If the Build America Bond program expires at the end of this year, long-term tax-exempt bonds could lose their latest pillar of support.
I agree, except I would be more blunt. If BABs is not extended the Muni
market will get smoked. The epicenter of the fire will be California,
followed very quickly by New York. Knowing that, D.C. is going to kick
BABs down the road. If they don’t, about $3 trillion in stimulus money
spent over the past few years will have been wasted. If Cali/NY tank,
all the lights go out. We are much more economically fragile than we
lead ourselves to believe.
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Muni's?
Muni's?? come on now...there will be probably as low as 50% (more) cut in residential tax basis....
the residential housing, is typically down as low as, selling at 35% of appraisals in 2004-05....AND on many of these houses, no tax at all has been paid for two years....and certainly, THOSE that DO sell, thereby establishing the gold standard for 'valuation' regards tax rolls...all these will immediately and sucessfully 'tax appeal' for a new official tax basis...eventually 2-3 years, the city has to reappraise ALL all the houses, for tax basis...forced to do so, if necessary by group legal action, or simply under the city charter/additional laws regards residential taxation, etc..
AND also, the city in bankrupcy, will TRY to get the police/firemen to accept lower staffing, lower benefits, and lower pensions...WHICH WILL BE SUCESSFULLY resisted, even in bankrupcy....as is now occuring in the FIRST major city bankrupcy, 2 years ago...
And at the State level, 'benefits' such as retirement are 90% of the last highest wages receivedFOR LIFE...and no cutbacks, should the retirees get a post-retirement job
90%...pretty good, eh? Teachers, State hiway patrol...
and, of course, "Triage approach to cutting back.." that would be completely reneging on CASH payments...set up 'bunk houses...like 1850's England...poor houses'....and KEEP ONLY the active-working/productive workers 'on the job' but paid a nominal 'comparable' open market wage...
the response to even a hint of 'Triage...' would be...releasing about 45,000 currently incarcerated prisoners..(never cut the fat, cut the muscle/bone) there will be a problem..this is specific to California, WHO FOR 20 YEARS ignored a FEDERAL COURT ORDER to build more prison space
communities would have to form 'block wardens' and there would be 'volunteer police, deputized or not..' and cooperation by those who witness necessary use of force, in arresting/stoping crime in progress...cooperation TO NOT SEE, NOT WITNESS...or die
i could be a brisk business in private shoot to kill authorized security...for the RICH..i mean
Bruce, enlightening and confirming.
?, how did muni's do in a lower tax env? Pretty well. In a higher one that is coming, can there be a better way to go? Admittedly, the tax code is totally FUBAR. And the exit to this near nightmare economy is total code revision, one that incentivizes productivity by all encon segments, widens the base, and simplifies corp taxes as well. After all why is bond debt ded. and divs not?? There are so many wrong headed rules and regs that it is stupefying. Most of these are like weeds keep growing and multiplying in problems.
Worst case scenerios are sketched by you. And they can happen= 50/50, and that is betting odds. But which side?
A better title would be "Socialist immigrant States demand tax exemption extention for the rich".
Gee, there seems to be a strong correlation between immigration levels and federally subsidized bond issuances.
If the Republicans had any brains they'd stop the subsidy for importing Socialist voters, of course they dont have any brains.
Actually, it doesn't matter if BABS is extended or not. If it's not, the Fed will simply step in. You're telling me they can secretly aid the bailout of Ireland (which it is doing), and yet can't bail out U.S. states? Nonsense.
not unless that state is aligned with the political power in Washington. Remember the Bush people (ENRON) went after California, with the electricity trading scam. That put then governor Gray Davis under recall, sponsored by the richest REP in the house, Darrel Issa. Arnold won, (Davis wanted to raise taxes and fees)
Now we have replaced Arnold, a hangover of sorts, but as soon as he is out, then Federal aid should be arriving, that is as long as Obama doesn't drink all the GOP KoolAid. I really expect CA, and probably NY to get more help, and that means BABS. A lot of it may have to do with the Bush tax cuts, which Democrats could allow to expire. If they extend the cuts, BABS will probably be the quid pro quo??
It doesn't have anything to do with any of that. It has to do with not spooking the clerks, who are still working and who will stop spending if they panic. There are $20 trillion worth of bailouts on tap. Every cent of it will be used.
Californias fiscal crisis is the flipside of the GOP attack in 2000, the current state crisis, like the greater financial crisis 2008, is 90% theatre for the masses. Although it is important to note that the (Goldman?) candidates in CA, Whitman and Fiorina, did not fare well in the election, that certainly helps CA with the Democratic powers in D.C.
Of course CA will be bailed out, the drama leading up to it was just the prelude. In the end CalPers may buy more Babs, even if it has to take the money away from GS to do so, not that Wall Street is too upset with Babs, its a shot in the arm for corporate AM. Any and all bailouts are welcome, except from some small red state Senators. Issa is CA49, by the way..
Funny. Cross my heart and hope to die, I called my Congressman at 10:00 and chewed out his aide, saying.....'Under no circumstances extend BABs.' I said look......'The French just stole their citizens 401(k) equivalents, the Irish just turned their citizens into ECB vassals. No way I want to have my 401(k) - or tax dollars - seized to pay lazy, state employee union "workers" in California to retire at age 35.'
I got charged up. I saw Ohio Congressman Marci Kaptur on Dylan Ratigan, and heard California Congressman Brad Sherman on NPR both proclaiming that the big banks need to be broken up. Sherman said....'It's easy. Your balance sheet can get so big, and then you have to start creating subsidiaries and selling them off.'
I called both offices and said, 'Look. I don't live in your state. I have no business with you, but charge on. God bless. And oh.....why is that that you two are the only people (both Democrats) in Congress who can think straight and have the scrods to go on public media and call a spade a spade.'
Of course when talking to my Congressman's office I said....'Why can't you be more like Sherman and Kaptur?'
ChanceIs,
Applause!
I am embarrased to be such a wimp that, so far, I have only call mine and I don't get too saucy because I don't want to appear irrational.
IMO they willl respond to the extent possible.
But they are in a world with a lot of issues and getting others to support key issues may require trading favors. That is the reality they are in.
Gee, what is the position of the tea party on BABS? Bet they cave. They'll also cave on the debt ceiling--revealing that all their backers are corporate interests which depend, in one way or another, on the flow of Federal money.
Obama might just win in 2012, because the Republicans are going to blow this mandate just like they did in 1994.
Thanks for the chart, Bruce. Looks like all the usual suspects, and a few outliers, pun intended. Do you know if the Feds are showing any liablility for this, or is it more off-budget crapola?
Step out of the bunker.
Why short ANYthing supported by the Fed, at this point? Just go long PMs and look longer-term. The net net of all this backstopping will be inflationary.
Joe Sixpack needs Dollares in his pocket and he will get them, after the elite have enriched themselves. That will pull prices up, at long last. J6P is being kept away from the table until the elites have filled their plates; then he will get a share of watered-down $$.
PMs are doing rather well dollar-up or dollar-down. The Fed is not going to let any states or their precious DOW crash/burn.
I am paying taxes in CA and have a fair amount of contempt for this crap; but I have to steer clear of that emotion or I simply piss into the wind and go short; which has lost me more $$ in the last few years than I care to contemplate.
Budget? We don't need no stinkin' budget!
And as far as I know, we still don't have one. Such talk just confuses people, and distracts from the purchase of another flat screen TV. Think Star Wars and "These are not the Droids you're looking for". BB will make it all be OK!
So, how does the little guy (me) short munis? Or buy puts?
Try seekingalpha.com/article/238056-six-ways-to-hedge-a-muni-bond-portfolio
1) short the ETF
2) short the rating agency (have you see the chart of MCO?)
3) short the insurers
4) swaps
5&6) Short the holders and underwriters
Looking at MUNI, note their core holdings are primarily in states other than CA and NY. You could go long one of these and short something will exposure to CA
8) I think Bruce is right, look for a buying op when rates go higher
Excellent Good Sir. Short the insurers. Wish I thought of that. Of course it would be shameful of me to go back to that well having done so well shorting those puppies back in '08.
By buying silver bullion; which also takes care of the rest of the pending disasters. One stop shopping.
No can do. Not that i am aware of. At least not retail. There is the tax feature that confuses the short. There are trillions in 401ks. If they were worried they could move the money someplace else. The prices today are not distressed because of ZIRP and QE.
Me? I am hoping for a buying opportunity. I want NYS/NYC at 7%.
There are ETFs and closed-end funds that are levered.
But I'm not so sure they are good shorts as I think state GOs will be bailed out.
Good luck
Hundreds of Muni Bond ETFs. Look here:
http://seekingalpha.com/article/30356-a-guide-to-municipal-bond-etfs-and...
A host of them are on Schwab's "Hard to Borrow" list. (For the uneducated, that implies that they have already been shorted into oblivion.)
I didn't find any that traded options. Ergo you can't can't short the munis by selling the calls or buying the puts. Life is unfair. What can I say??
I didn't see any levered short funds, but I am sure that they are out there.
I wouldn't bet on the GOs getting bailed out. I think that the Pubs are putting a stop to the bailouts. The BABs might sneak through under the dusk of the typical year's end, no accountability, Congressional machinations.
Nothing jumps right out at me as a correlated trade/substitue for a muni ETF short position. Unless of course you can short CALPERS. That would be the trade of the century.
"I wouldn't bet on the GOs getting bailed out. I think that the Pubs are putting a stop to the bailouts."
Bwahahahahahahah - are you kidding me. Dude, get a grip.
Thanks BK, as usual great insight. What a game. Even if DC extends this ponzi, how long can their shell game go on?
How long? Depends on how much we extend and pretend. My guess? Between 6 and 60 months. Not very long at all.
Bruce,
You know I'm a frank guy. And I am not a racist. But I have to state the truth you know, I have to state the truth---I am what I term a "mild sexist". In this case that means I usually don't put any credence in what women think about money or markets. But sometimes exceptions have to be made.... Meredith Whitney has been all over this one Bruce. When I see Meredith Whitney link or on Bloomberg, my ears perk up. She has a lot to say on this municipal/state budget stuff. And also I think you already know Chris Whalen is a little afraid on property taxes 2012. Better watch this if you haven't seen it. I can't afford it, but I bet you can Bruce---I bet her paper report is SUPERB.
http://www.bloomberg.com/video/63384626/
I don't know how prevalent it is, but locally two BABs have been issued with interest only payments for the first eight years for a parking garage, and fifteen years for a sewage treatment plant, with the understanding that by then they would generate enough revenue to cover the principal payments.
The interesting thing about all of this though (from what I've read), is that these bonds are ultimately obligations of the IRS, so I'm assuming that upon issuer default, they will have to step in and make the bondholders whole, claiming title to the failed municipality.
Then what? A better result than if CA and NY were burning a month from now?
I would be just fine with those two states in smoldering ruins, unfortunately it would spread across the rest of the country I am sure.
Surprised to see so few comments. The muni bond market is likely to be the 'next big thing' in the ongoing collapse.
I work in the bond market and you are partially correct. Your logic is true in the sense that the municipal market is a house of cards. That being said, this market is trading like there is an implied backstop/bailout should anyone get near the cliff. I believe this to be the case, unfortunately. The evil empire will not let go easily. It is the same reason people get so upset losing money shorting the markets. Their logic makes perfect sense, but the people in charge will not yield power without a fight...
Quite ironic that the biggest, bluest states are the most deeply in the red. Texas apparently an anomoly.
Texas is a blue state, they just dont know it yet, Socialist immigration works :P
Heaven forbid California is forced to face its fiscal problems head on. Take your time with your little social experiment over there, guys - the rest of us will keep the creditors at bay.
Thanks Bruce, as a member of the Au state. Am I right to suppose that this money is largely being pushed down the line toward local redevelopment groups? I see these various muni governments spending with one hand, and cutting vital services with the other, a perverse situation. This is good for the corporate recipients of this money, and bad for small business, meaning other than corporate NYSE listed companies.
Finally, doesn't all this local subsidy call into question some RICO laws? How can muni governments raise taxes on existing businesses, and give subsidies to corporate competitors to build new franchises?
Finally should I be buying these bonds?
how are Hawaii & Nevada doing fiscally ? RE in Hawaiian islands and in LV is getting smoked and wonder how those 2 states are being affected since both depend a lot on discretionary travel spend budgets..