Detroit Attempts To Sell $250 Million In Bonds Without Financial Disclosure Via Goldman
Here comes the first municipal Hail Mary: Detroit is attempting to sell $250 million in debt, while disclosing in the associated prospectus of the possibility of filing for Chapter 9 bankruptcy protection. The kicker as Bloomberg News reports - no recent financial statements are available. In fact, Detroit is providing investors with a a financial statement from June 30, 2008, with a fiscal 2009 report "expected" to be complete by May 31. To say that a lot has changed in the past two years for the city whose unemployment some say is in the double digits with a 3 handle, would be an understatment. Yet we are confident that having no access to actual financials will not stop investors who in their feverish quest of Return On Capital are completely forgetting about the Return Of Capital concept.
“This issue is not for the faint of heart,” said Richard Ciccarone, chief research officer of Oak Brook, Illinois-based McDonnell Investment Management, which oversees $6.8 billion of municipal debt. “It certainly raises eyebrows.”
Detroit will provide backing by payments of state aid from sales taxes to the general obligation issue, which enabled the issue to maintain investment grade. Michigan’s state treasurer can pay the aid directly to the trustee for the bonds, bypassing the city to ensure the debt is serviced, according to offering documents. The treasurer also agreed not to withhold payments when the city is late filing financial statements, as it has in the past.
And just who is the bank that is confident it can pull the wool in front of its clients' eyes? Why Goldman Sachs of course.
Detroit is selling $250 million of bonds through investment banks led by Goldman Sachs Group Inc. to help cover budget deficits expected to total $280 million this year. The deal will probably appeal to investors seeking high-yield municipal debt, predicted Ciccarone, precluding the city from a market with tax- exempt yields near three-month lows.
Not too surprisingly, Detroit will end up paying a spread evern greater than Greece
Detroit general obligations maturing in 2024 traded yesterday at a yield of 7.56 percent, according to Municipal Securities Rulemaking Board data. That compares with yields of 3.36 percent to 3.5 percent for top-rated 14-year municipal debt yesterday, according to Municipal Market Advisors Inc.
This is the lunacy of CDOs all over again, when every Tom, Dick and Harry would park their capital into whatever was being pitched to them by Goldman persistent , having no idea about the actual investment, with Goldman most certainly buying up CDS on Detroit just after the closing of the auction, for "hedging purposes" (and no, that in itself will not push Detroit into bankruptcy: at best it will make the imminent solvency crisis come faster and be more painless).
Detroit is not alone as munis slowly but surely become the next subprime. On deck as offerings by Florida, California, Massachussettes, and variety of other municipal issues.
(10 votes)
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on Thu, 03/11/2010 - 12:01
#261947
At some point, the yield may be double digit with a 3 handle on it, too.
on Thu, 03/11/2010 - 11:52
#261962
"Michigan’s state treasurer can pay the aid directly to the trustee for the bonds, bypassing the city to ensure the debt is serviced, according to offering documents. The treasurer also agreed not to withhold payments when the city is late filing financial statements, as it has in the past."
Now you're talking. Mother's teat will be placed directly into your mouth to ensure that your nourishment is received.
on Thu, 03/11/2010 - 11:58
#261974
Thanks for that. Classic.
on Thu, 03/11/2010 - 12:20
#262039
Ahem. "Mother" is a hairy, bearded 350 pound guy.
Make sure that it's milk that you're getting.
And you're welcome for that image too. :)
on Thu, 03/11/2010 - 12:26
#262057
One man's teat is another man's penis. Just as long as the fool buying the paper thinks he's gonna get fed, what difference does it make? Just push the paper out the door. And please, don't talk when your mouth is full.
on Thu, 03/11/2010 - 12:00
#261982
desperation.....although I do think Detroit paper is better than common in WFC, STI, RF, etcetera....
on Thu, 03/11/2010 - 12:32
#262071
Have you been there lately, DH? It is a terribly scary place. I thought I was in a post war zone. It's truly terrifying when you start going into the books of 2008.
Who knew WFC could be so Mad Max? :)
on Thu, 03/11/2010 - 14:06
#262195
I seem to be the meme of the week.
Yay me.
on Thu, 03/11/2010 - 14:09
#262197
glitch induced double-tap
on Thu, 03/11/2010 - 15:16
#262266
Detroit or Regions?
Deadhead, did you see Liesman strumming the classical playing Uncle John's w/ Bobby? Just caught a few seconds, but have been meaning to google it. Another case of this financial mess pissing me off!
on Thu, 03/11/2010 - 12:01
#261985
The reach for yield is the source of so many of our problems today. Of course, that reach for yield was driven by institutional investors having absolute return requirements (to fund pensions, support insurance claims, etc.) in a low-yield environment.
Greenspan really screwed us
on Thu, 03/11/2010 - 14:40
#262256
Although that's part of the problem, another big part is crazy, unaffordably large pension promises, "financed" by rate of return assumptions of 8-10% that are simply not realistic. You wouldn't have to chase yield as much if you had funded your pensions based on realistic rates of return.
on Thu, 03/11/2010 - 21:34
#262717
True enough. I didn't mean to oversimplify. The pension promises are / were obscene. But I have seen firsthand how portfolio managers reach for yield with little to no consideration of the risk they incur. Some of that is due to market competition (got to beat the competition), but some is truly due to the low rate environment. I was keying off the comment how this bond would be attractive to yield-hungry investors and how foolish that is.
But your point is true and well-taken
on Thu, 03/11/2010 - 12:04
#261993
buddy, can you spare a dime?
http://www.youtube.com/watch?v=CVE72Ae82Tw
on Thu, 03/11/2010 - 12:10
#262002
remember back in the day institutional investors were considered the smart money? Now they're so dumb it's laughable.
on Thu, 03/11/2010 - 12:11
#262006
Wish I could join them. If only there were an ETF for that!
on Thu, 03/11/2010 - 12:13
#262012
Ding a ling.....ding a ling...
BB: Hello, Benjamin Bernanke here.
Dave Bing: Mr. Bernanke, Dave Bing, Mayor of Detroit calling.
BB: whispering silently to himself "oh, dear, even I can't bring myself to buy this paper"
on Thu, 03/11/2010 - 12:21
#262044
YES, WE CAN!!
on Thu, 03/11/2010 - 12:22
#262050
BO couldn't even read off his teleprompter today! Dude was either hungover, or needs glasses.
on Thu, 03/11/2010 - 12:44
#262107
+1
Thank God they are a measly 250 million. Unless they are planning on raising a private army to run the gangs out that money may as well go down a well. I know...They are going to buy cheap stocks. Turn that 250 in 500 on a weeks time..SPY's anyone?
on Thu, 03/11/2010 - 12:15
#262021
Municipal Subprimes. Perfect description, Tyler.
Like a NINJA loan to a punkass kid with a middle class Dad promising to make the payments. What could possibly go wrong....???
on Thu, 03/11/2010 - 12:16
#262022
Skimming the market for more fees on paper, while silently repositioning into the precious metal markets.
Goldman are smart, you are not.
on Thu, 03/11/2010 - 12:21
#262045
"The deal will probably appeal to investors seeking 'crapcakes'."
on Thu, 03/11/2010 - 12:26
#262058
The debt games central bankers play and the crisis consequences:
[T]he vast majority of international trade is on the back of our massive debt. What happens when the exponential growth in government debt begins to collapse? Debt is money, international trade will collapse right along with it, as it already has due to the collapse of private sector debt. The life support cannot remain forever. ~ Nathan’s Economic Edge
Also:
[T]he current monetary system was destined to inflate the debt until we hit the upper debt limit and then collapse. A monetary collapse is not a pleasant experience. It can result in a deflationary depression that sucks away jobs, income and assets from the citizens (to the bankers for pennies on the dollar). That process has already started. The alternative is severe or hyperinflation where one’s purchasing power is eroded.
The solution?
“We, The People” have to restore the nation’s money powers to the constitutionally directed Congress where, “We, The People” can vote out any legislators every two years if they don’t properly respect the money power bestowed upon them by the people.
http://economicedge.blogspot.com/
And from chrismartenson.com
The Myth Of The Recovery (Ben Johnson)
Overall, government support accounts for roughly 77 percent of economic growth in the third quarter of 2009, according to my analysis of Commerce Department statistics. This means that non-Washington GDP growth was closer to 0.34 percent from July to September 2009, instead of 2.2 percent.
After Financial Ruin, Plotting America's 'Comeback' (woodman) Interview with David Walker on NPR Fresh Air
There are three key points with regard to spending. Spending more money than you make on a reoccurring basis is irresponsible. Irresponsibly spending someone else's money is unethical; and if you're a fiduciary, a fiduciary breach. And irresponsibly spending someone else's money when they're too young to vote and not born yet is immoral. And all three of those things are going on right now, and they threaten America's future.
Food-stamp recipients up to record 39 million (mhoop)
Almost 39 million Americans received food stamps in December, the most ever, as the jobless rate hovered near a 26- year high, the government said.
Recipients of the subsidies for food purchases climbed 23 percent from a year earlier and rose 2.1 percent from November, the U. S. Department of Agriculture said Thursday in a statement on its Web site. The number receiving the benefit has set records for 13 straight months.
http://www.chrismartenson.com/blog/daily-digest-march-11/36778
on Thu, 03/11/2010 - 12:38
#262088
RISK FACTORS:
Omni Consumer Products may not allow Delta City to honor the obligations of Old Detroit.
on Thu, 03/11/2010 - 12:43
#262104
Nice!
Quoth the mayor of Old Detroit: "I'm... having... trouble..."
on Thu, 03/11/2010 - 14:09
#262198
That would be a far brighter prospect for Detroit than anything I see happening.
on Thu, 03/11/2010 - 13:56
#262189
I thought no doc loans were a no go???
on Thu, 03/11/2010 - 14:02
#262192
aaaand another batch of retirees are about to be hoodwinked into buying shit based yield...
on Thu, 03/11/2010 - 14:08
#262196
Why would the State of Michigan have anything to do with these bonds? This is lunacy. People outside the state may not know it, but there is enormous political hatred between Detroit and virtually the entire rest of the state (cities of Flint, Pontiac, Saginaw and Jackson may or may not be exceptions).
Realistically this seems like a parting gift of Gov. Granholm to the City of Detroit. Maybe she's hoping that the neverending corruption investigation that is progressively taking down so many Detroit politicians won't eventually work its way up to her.
on Thu, 03/11/2010 - 14:32
#262250
I'm guessing that Detroit threatened to BK if it couldn't raise the money, which it can't without the state guarantee.
If Detroit defaults the state itself would have problems.
Blackmail to allow the can to be kicked just a little bit further and hopefully into the next persons yard
on Thu, 03/11/2010 - 14:23
#262240
The US should reroute the Detroit river around the other side of Detroit and then give the city to Canada. Michigan would then be a great state to live in.
on Thu, 03/11/2010 - 19:50
#262586
And Detroit would be a better city to live in... classic win/win.
on Thu, 03/11/2010 - 16:38
#262342
They sold the whole offering in 5 and a half hours
at 5.08%.
on Thu, 03/11/2010 - 17:31
#262411
Detroit today successfully sold $250 million in bonds – just five and a half hours after the debt was first offered on the market. The sale of the fiscal stabilization bonds will enable Detroit to allow the city to pay off its short-term debt and restructure its long-term financial obligations at lower interest rates. The city has an overall $325 to $328 million accumulated budget deficit.
Despite the city’s junk-bond rating, the 5.08% interest rate the city received was lower than the 5.75% estimated by Mayor Dave Bing in his budget-deficit elimination plan. The lower interest rate will save the city a $1.1-million payment and adds $20 million to the mayor’s plan overall, said Dan Lijana, a Bing spokesman.
Lijana said $500 million was offered for the bond, meaning twice as many investors tried to buy the city’s debt than was necessary. The structure of the deal was enticing to investors who sought to buy high-yield municipal debt -- particularly because the state treasurer is required to repay the debt as opposed to the city.
Last month, the state Legislature voted to allow Detroit to exceed the $125-million cap placed on the sale of bonds. The bonds were sold through investment banks led by Goldman Sachs Group Inc.
"Our plan to bring financial stability to Detroit took a critical step forward today," Bing said in a statement. "We've worked hard to restore trust in our city and city government and this deal is an endorsement of our progress. We will continue to ensure the city is spending within its means by eliminating waste, going after every dollar we're owed and maximizing efficiencies."
on Thu, 03/11/2010 - 18:44
#262518
Detroit has been a mess for over 40 years. Made worse during the Coleman Young period (20 years), had a chance with Dennis Archer and then plunged deeper into the toilet with gangster Kwame Kilpatrick. Bing if anything is a positive for the city but fighting the deep rooted corruption is difficult as he has already figured out.
With all that said, I reckon the city will make a recovery quicker than the affluent suburbs surrounding it. Come 2017 when Detroit reflects back on 50 years since the civil rights riots, we'll all be kicking ourselves for not getting in any earlier. Just like turning points in the market, Detroit is now 99% bears.
on Sun, 03/14/2010 - 19:50
#265364
The profile of this deal is right up Goldman’s alley. A desperate client, a black box mini-market which Goldman controls, and no basis for fair valuation, just pure trading and speculation.
Why bother trying to predict the direction of the DOW or S&P 500. This is the real money play; the stuff that multi-million dollar bonuses are made of. It’s more about market power than intelligence. It’s 10% real fair market competition, and 90% market manipulation.
Ironic, isn’t it, that by sending the economy into a tailspin with their risky trading practices, these Wall Street firms create even more victims and lucrative trading opportunities for themselves. Keep them moving, keep them off balance, then kick them, beat them, and rob them when they trip and fall. That’s the game boys and girls. What a scam. What a beautiful scam. Imagine how much money Goldman could make if all city and state finances were in the same sorry state that Detroit’s is. I bet Goldman dreams about that a lot.
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#301762
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