California One Step Closer To Insolvency After State Cancels $2 Billion General Obligation Bond Sale

Tyler Durden's picture

Five days ago a great white hope appeared for the great bankrupt Golden State (Baa1/A-), in the form of $2 billion in GO bonds, which were supposed to be promptly syndicated via underwriters JPMorgan and Morgan Stanley. This would have been the first bond sale for California since November: a critical milestone as the state creeps ever closer to a full-on default. Unfortunately, the creeping just turned into a casual jog after Jane Wells (@janewells) just tweeted that California has cancelled its bond sale "after legislature fails to approve cash management flexibility bill [the] Treasurer said he needed to attract investors."And seriously, did California think it would succeed where so many other high yield issuers have recently failed?

Below is the official bond sale calendar from Lockyer's website.

So as Lockyer contemplates how to best approach DC about a bailout, here are recent California CDS levels. Pick your entry point.

Chart via Lehman Live

h/t Credit Trader

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makeyoumiss's picture

Gee, who woulda thunk it.

B9K9's picture

I 'thunk' it until I looked into the situation a little deeper. As a born & bred, life-long native, trust me when I say it's obvious the state has changed for the worse. So, donning my bean-counter cap, I dove head first into the 1,000 page budget.

As it turns out, California is nowhere close to being insolvent or on the brink of bankruptcy. Compared to the US, the proposed budget is only 6% of state GDP vs 25% for the USA. The projected deficit is only 1% of state GDP vs 9% for the USA. Total indebtedness is only 6% of state GDP vs 89% for the USA. (Not counting all the various unfunded federal liabilities like SS & Medicare which push the total national debt towards $100 trillion or 700% of GDP.)

Clearly, if the state had access to the printing press, it would be considered in much, much better shape than the country as a whole. Which hints at where the state (and perhaps others) will be heading when we finally enter the national crisis stage.

What is going to happen in California, and what so many people miss (which is the point of my little note here @ good 'ole ZH), are the available cost reduction alternatives that are going to be implemented. Looking closely at the 'small-print' way back in the rear of the governor's proposed budget (which is where the "good" stuff is always located), one comes across various trigger actions resulting in massive cutbacks & layoffs. Add them up, and the state instantly goes into black.

Some of the public policy advocacy groups have gotten wind and are starting to sniff out the details with the predictable screeching & crying. But when push comes to shove, there is going to be no other alternative. The real biggie is when the Legislature will be forced (by a 2/3 vote) to suspend Prop 98 which provides a locked-in guaranteed portion of the budget for school funding.

When that happens, everything is placed on the table. At that point, we're looking at a 10% payroll cut across the board, a 5-10% boost in retirement contributions, and a 5-10% reduction in headcount. In addition, massive cut-backs will be initiated in various social services programs, including Medi-Cal and other gold-plated give-aways for illegals.

In my various conversations with the kind folks at the DoF, I had mentioned that if this were a private turn-around situation (which is where I cut my teeth), this would be imminently 'do-able'. The only problem, of course, is the political situation involving a public entity.

But if you step away and look at the big picture, the 'political situation' is merely a cover for those who still have "options". Once the options are no longer available (eg getting bailed out by or issuing yet more GO bonds), and the harsh light of day is burning brightly (read: Controller's office is reporting no more cash in the till), it's really all over for the public sector leech-fucks except for the crying.

Anonymous's picture

Hey B9K9
How is it that a California resident is a different person than a US resident? On a quick ballpark, California approximately represents 12-13% of the US population and GDP. So take 12-13% of the US debt and budget deficit and throw it back into California taxpayers lap. That instantly gives California over $1trn of debt and $200bn of budget deficit. Now go re-run your US vs Cal numbers. And Cal vs Greece while you are at it. Keep 'thunking' my friend.

B9K9's picture

Ah, the good 'ole 14th Amendment argument. Sorry, I'm a state's rights advocate. Review a little history, and you may discover how the US of A was originally formed. Hint: it's a federation of sovereign states (hence the electoral college). When this sucker goes down, ain't gonna be nobody payin' off Uncle Sam's debts, simply because there's no value-add in the proposition. However, OTOH, a true representative entity that delivers actual benefits will strive to maintain a sound credit basis.

We can see the same mentality being played out everyday on an individual basis. Take someone who has credit-card debt at 5-6% of their income (Calif) vs being underwater on their mortgage to the tune of 200%+ of their gross income (USA). What do they do? Why, they pay the c/c bill religiously since in many cases it's their last remaining life-line. Meanwhile, the mortgage hasn't been paid in over a year, while the 'home-owner' still gets to live there rent free.

IMHO, the USA is toast - the center cannot hold. After the default/repudiation of the nat'l debt, we'll see a devolution to regional alliances and/or super-states + satellites.


Anonymous's picture

ins Schwarze treffen,

Anonymous's picture

you stupid mother f 's take a look cali's CAFR's to see the trillions in assets held

Anonymous's picture

"Add them up, and the state instantly goes into black."

Where are you looking? TIA

Anonymous's picture

Where do you see the trigger actions?

B9K9's picture

You gotta read through it page by page. Note that this is a political document, so after very long preambles lavished on all the claimed improvements, they slip in a few lines that include things like "A savings of $1.8 billion as a result of ..."

It only takes a handful of these to all of a sudden come up with $20 billion in cost cuts. As I mentioned in another post, if you don't want to snoop through the details, simply check out any public advocacy group. They've got it all laid out starting with "Women, minorities & children hit hardest". LOL

This thing really is a comedy show. The cancelled GO auction was a result of the Legislature accomplishing nothing of substance at Monday's 'historic' special session called to deal with the budget crisis.

Next up: the Controller telling them there's no money to pay the bills, which will force Arnie to shut-down the entire state government apparatus. After that, Prop 98 gets suspended and away we go with the "triggered" 10-20% cuts across the board - including schools.

Jeff Lebowski's picture

I won't dispute you, but two questions from the CA controller's page - if you would, please share your comments.


1.  General Cash Outflow

2.  Income tax receivables (only April available) and consequences of lower tax revenue decreases dwarfing the cost reduction alternatives


Everyone is entitled to their opinion, but I believe the combination (nationwide) of lower tax receivables, unemployment, social security, and baby-boomers retiring and moving from equities into annuities is the perfect storm and too obvious to be a black swan.


B9K9's picture

The Controller's web page tells the story of the precipitating event(s) which are going to trigger various emergency measures. However, it provides no clues as to the various budgetary alternatives. For that, you have to look at the detailed budget - see the link above.

Edit: I've found out over my career that sometimes it's easier to let an opponent reveal where opportunities are hidden, by tipping off what they're trying to protect, rather than engage in a strictly top-down analysis. If anyone is curious as to where the looming massive cuts in the California budget are coming from, one need look no further than the screeching pigs crying the loudest:

Anonymous's picture

Now please tell us what happens to the rest of us, nationally. Hyperinflation, muddle through, worst Depression ever? (Seriously, please tell us. All I can find for way of predictions is Gold Bitches, long lead and canned goods.)

B9K9's picture

California is simply a precursor to what is going to occur at the Federal level when Ben is finally forced to quit printing benjamins. The harsh reality is that the $USD is linked to a very hard oil peg. We **think** we can print, but in actual fact, we're no different than Greece.

So what happens when has to implement the exact same set of cost reduction measures that are occurring in California and the other states? Deflation, baby, deflation.

Right now, the only thing propping this sucker up is QE. Once Mr Market forces Ben's hand, it's all downhill from there.

With no/limited UI benefits, reduced welfare/food support, high unemployment, and a pissed-off & armed public angered at the $trillions lavished on the banker/politico mafia, it's gonna be an epic SHTF moment.

They'll be teaching this shit as critical history 200 years from now in all elementary schools.

spanish inquisition's picture

Interesting..I will posit a strategic cancellation. If the FED has enough to back door/ back stop Greece bonds, they sure as well have enough to help out CA. Charity begins at home, I suspect they are working out the details.

It's going to be based on the Greece model. FED structures it so Greece gets cheap money and looks like they are meeting obligations (and the FED looks like it is not involved)

I think the smaller world sovereigns are catching on. Either go to sovereign debtors prison for 30 years or say FU. The FED will run in with money and support.

So, in conclusion, This can go on indefinitely and will work if we all , everyone pull out a dollar, look at it and say "It's really worth a dollar, it's really worth a dollar" and we will be fine!

geopol's picture

Controller's office is reporting no more cash in the till), it's really all over for the public sector leech-fucks except for the crying.


Yes, Fuck them after all...No private sector to run to bunch of arrogant little bureaucrat pricks..

Sounds a little harsh...yes?



Anonymous's picture

I think you're dreaming if you think CA state government will make those cuts "automatically". The state government is the public sector unions... and the unions are the government.

Consider this from Bloomberg:

"Exhibit One is Los Angeles, where Mayor Antonio Villaraigosa asked the City Council to fire 1,000 of its 35,000- plus workers.

The council and labor unions balked, and on Feb. 17 Moody’s Investors Service revised its outlook on the city’s bonds to negative. The rating company said the plan to eliminate those jobs could generate $65 million in savings.

“Predictably, this proposal has met with opposition,” Moody’s said. “It is, unfortunately, one of the plan’s few immediate, tangible cost-saving elements, and delaying its implementation will, while preserving jobs, potentially weaken the city’s long-term credit quality.”

It is rare for rating companies to comment on such things as proposed layoffs. With this salvo, Moody’s said: It’s time to resort to the ax.

As the national numbers show, politicians have been talking about firing employees for years.

They haven’t done it. "

They'll send kids out into the rain before they cut teachers' pensions, IMO.

Anonymous's picture

another clueless bean counter look at all of cal CAFR'S to see the real surplus of assets are all zero writers and readers that stupid,or paid in federal reserve notes to they are smarter than that,they demand payment in coin

FLETCH's picture

just a nip here, tuck there and a boob job should fix CA right up!

Dark Helmet's picture

Like ohmygod like California is like soooo totally bankrupt like oh my god!

Cognitive Dissonance's picture

We passed the minor surgery decision point decades ago. Time to cut off the head, freeze it and grow a new body. You know what to do next, right?

Anonymous's picture

Get Neveldine & Taylor to write the script? I'm thinking "Crank: Short Circuit" as a working title...

madRazor's picture

Just hitch the head atop the bio-engineered super-body of Spiro Agnew and take over the world!

malusDiaz's picture

You DID find the Head of Vecna!


This Time its real for sure! Now go ahead, you know what you need to do next...

Problem Is's picture

"just a nip here, tuck there and a boob job should fix CA right up!"

Broke Ass Arnold's $12 Billion Cee-ment Ditch Project

...Known as the "Peripheral Canal"... is a giant California Tit Job.

This is what steroids does to your brain. This is Arnold's brain on drugs.

"I govern a broke ass state fast on its way to bankruptcy so my cure is to issue ANOTHER $12 Billion in bonds to dig a ditch no one needs."

Hey Asshole Arnold... make like a Palin McMILF tree and leave... early.

mnevins2's picture

My personal "entry point" is N-E-V-E-R.

Coincidentally, since I'm not a super-genuis/quant, I have the same "entry point" with equities. Who'd have thunk it?

I guess that Lockyer better get on the phone with Uncle Ben ASAP!

ShankyS's picture

Why can't people accept that the whole global financial system will eventually implode? I mean really. Let's get on with it so a real recovery can happen.

merehuman's picture

Read your Blog a few times.

We are all waiting, knowing it has to, knowing it will....But when??? Should have fallen apart already!

We should be thankful for the extra time we have to prepare and warn others.

Each one of us must take SOME responsibility and advise family, friends and neighbors.

This is not an exercise! This is not a drill !

Dark Helmet's picture

"The ability of the market to defy gravity and deny reality exceeds your ability to bet against it."

Anonymous's picture

Andrew Gavin Marshall has written IMHO a compendious article
on the world financial crisis. That is if a 26,000 word article is compendious. no link but it is recent.

jdrose1985's picture

LOL Shanky Re: falling apart. +1


Each one of us must take SOME responsibility and advise family, friends and neighbors.

It's sad, because I've tried to be responsible and let people know what's going on..(MM freeze, credit contraction, dow-gold, etc) I've made charts, put things in historical context and laid it out simply as can be.

I'm pretty bummed. To this point, I've been totally ignored except by my lifelong best friend and his brother who both cashed out their IRA's and paid down debt about 2 weeks ago. I mean, i'm not alarmist about it nor am I pushy in any way. I've gone about it in a way of trying to break it down in layman's terms. It's not rocket science.

I just feel like people don't even give a shit about what's going on. Been struggling with this for weeks, it's got me down and out I guess. I never worry about things, but this has me kinda shook up.

I'm not sure what to do. I bid my time, waited til the point where the DX started rallying and stocks stalled, being patient.

I guess people just see the monthly statements getting higher and higher and think i'm crazy or something.

I can only save myself.

Anonymous's picture

What, in your mind, is the strongest, most compelling argument for cashing out one's IRA?

35Pete's picture

Betting, based on several years of informationa and events, that the equities market is going to crash more than the combined penalties and taxes of earlier liquidation.

I'd do it too with my 401K but I'm stuck.

Plus, there's chatter on the Hill about "saving Americans" by offering to convert retirement accounts to gubbmint annuities guaranteed to pay an income stream for life.

Shockingly, and this really surprised me [/sarcasm], the gubmint would convert your IRA to treasury bonds.

And promptly spend it of course.


Anonymous's picture

If you think the stock market will crash, just liquidate the equities in your IRA and keep it in cash, in the IRA account. Why cash out the IRA and pay the penalties?

Anonymous's picture

Because - if you keep your money in a registered account under government control, they can change the rules and either a) force you to what they want you to do - such as forced buying of T-bills; OR b) the cash will become worthless as they print the dollar to death (already happening at an accelerating pace).

Get the money out, and put it into something that will either maintain its purchasing power or increase its purchasing power as our nation implodes. Maybe even get some out of the country :D

Better question is this: why would you leave your money in an IRA? Tax bennies? They are coming for everything we have, and if it is in an account they can access or control you will lose big-time. Read about what Argentina has done and is doing. Coming soon to a U.S. theater near you.

Anonymous's picture

You can only ever save yourself man - but thats enough

JohnG's picture

Avg Joe is a complacent Kool-aid drone.  I've been trying the same thing.  Just people don't get it.

I hope they don't come looking for help from me because I will turn them away.

I'm not so cruel as to say "I told you so," but I will say go away.

35Pete's picture

I'm gonna tell them that they're an active participant in Darwinian Selection and who am I to interfere with mother nature.

Sorry. I'm so fed up with sheeple that I care no more about THEIR fate.

It's the folks that know whats up and are screwed anyways that I care about.

macfly's picture

ditto that, everyone I know thinks I've fallen down a rabbit hole, and their eyes glaze over when I try to tell them what is going on. I guess I should also mention that I live and work in LA too!!


I feel so alone!! ;-)


So happy to see all the other insomniac worries here, I kind of view this as my own 12 step program.


Hello, my name is Fred, and I'm worried about the entire collapse of the global economy. I haven't had a drink in weeks, but I have some very nice '82 Cheval Blanc waiting on stand by.

Anonymous's picture

To quote Jeffrey Saut who quoted someone else, "If you tell 100 people that something bad is going to happen, 50 people will hate you immediately. If you are right the other 50 people will hate you later." This is now my sig.

There really isn't much more you can do. Once they get it, it will be too late. Just don't brag about it or gloat. I expect the worse it gets the more I am going to have to lie about how I made out or how well protected my assets were.

But, hey, maybe we are all morons and the economy is fine and we aren't already bankrupt. Stranger things have happened, like alien abductions, and the magic bullet theory. What? Those aren't true either???

Livin' la vida SoCal!

malusDiaz's picture

If you know whats happening... wtf are you doing in LA?

Get_to_the_choppa's picture



And I live in CA for cripes sake.  Not that I want to see riots in the streets when the checks stop coming to all those state workers and social dependents, but if it comes to that, so be it.  Let's just get on with it already. 

35Pete's picture

There's a de facto rule here in the hinterland called the Kali Kook Rule.

It basically states that if you admit that you're from Kaliforinika then you have to prove to the vast majority of normal people that you're not wierd.

I think the problem that the Kalifornians here have is that they are not wierd (and you're in conformance with the rule too as demonstrated by your thoughtful and deliberate communications in this site) Which is wierd for your run of the mill Kalikook neighbors. They have a serious issue with reality.

Now there are a lot of delusional folks here in flyover country, true dat. But you'll have more success talking with us then you will with the psychological aberrations you call your neighbors.

Might I suggest that you emigrate? Why the hell would you want to live there anyways?

Come to flyover country. It's the Israel, the promised land for rationale, non-kooky salt of the earth folks.

We have one rule though. NO Cadillac Escalades.

deadhead's picture

Thanks for posting this, the hits just keep on coming.

Thank goodness we New Yorkers don't have to worry about this stuff because we are in such good financial shape after many years of low taxes, strict financial discipline, and keeping NY budgets very, very low.   Phew.....


john_connor's picture

We would really be in the crapper if states like Illinois and Arizona were in trouble.  Thankfully those two are on solid footing.

deadhead's picture

ya know, from what I read, i'm wondering if Illinois is really the number 2 contender to Cali....i don't follow Illinois locally so to speak, but I often catch nasty articles about them.  anyways, it's amazing just how many states as well as some municipalities are so close to the edge.

seadragonconquerer's picture

Yes...trillions in debt at the national level, billions at the state level, millions at county and city level, and individual consumers in so far over their head - or unemployed - that many here - in formerly wealthy Santa Barbara - have pretty much stopped buying anything but absolute necessities, thus wiping out small business and sales tax revenues. Doesn't matter much whether Calif. floats more bonds or not; the water is now coming in faster than gov't can bail.