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Faros Special Report On The Severe Consequences Of The "Build America Bond" Program Expiration
Courtesy of Douglas Borthwick at Faros Trading
US Yields Not Reflecting Risk (pdf)
Today's tax compromise in the US extended all expiring Bush tax cuts by two years. The story though does not end here. The most important thing missing from the tax extension was the expected extension of the Build America Bond program. The Build America Bond program has been the municipal market's saviour over the past 18 months. Since their introduction in April 2009 more than 174 Bio USD of taxable securities have been sold by municipalities backed by the program, one where the US pays 35% of the interest due on the debt.
This week we learned that the New York State Pension Plan is facing a 70 Bio USD deficit; in addition, New York State decided they would hold back 2 Bio USD from New York City. We also noted that the State of California issued a State of Fiscal Emergency at a time when their expenses will out-pace their revenues over the next 18 months by around 26 Bio USD. Governor Schwarzenegger stated that "There is no money, except when the economy comes back." We do not see the economy coming back soon.
Last week Sheila Bair, the Chair of the Federal Deposits Insurance Corp. wrote in an editorial in the Washington Post that "relentless federal borrowing will directly threaten our financial stability by undermining the confidence that investors have in US government obligations." Explaining that the US needs to cut its debt or the next financial crisis may start in the US. Today's tax-cut extension does not help.
On a day when the market focussed on the Budget vote in Ireland, a country that makes up about 1.8% of Europe's GDP, we are concerned that no one is looking at the growing problems in New York, California and Illinois, three states that comprise 25% of the US GDP. The expiration of the Build America Bond program could prove to be a terrible price for the US to pay and we expect squabbles in the US Congress regarding the bailing out of States in 2011 that could easily rival that which we have witnessed from the European Union over Ireland and Greece.
The ECB is the only body capable of helping Europe see through their issues and we understand the FED is growing increasingly frustrated that it is the only one capable of action in the US, given a locked Congress and an austerity-driven Tea Party. Fed Chairman Bernanke said as much in his op-ed in the Washington Post, where he stated "The Federal Reserve cannot solve all the economy's problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector." We continue to expect that QE3 will include the purchase of Municipal debt, a true can of worms.
Incidentally, as our recent poll demonstrates, Zero Hedge readers agree with this assessment, and continue to be about a month ahead of the curve.
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The Fed might be well served using some of that QE to sit on the commodity markets.
We *know* that, even in a relatively stronger economy, things start to come apart at $140 oil and there are stresses much earlier. I'm not sure the current economy could tolerate $100.
Alternatively, higher oil prices help Mexico, meaning the US doesn't have to bail them out!
Also, I'm not sure they will risk pissing off Big Oil and our 'friends' in the Middle East.
We will see $200 oil in the next 3 years, IMO. Probably the government will start paying gas rebates, to subsidize the increase. Or they will vote in carbon taxes, and the world will become a bureaucratic hellhole.
http://psychonews.site90.net
PsychoNews: Exposing the Oligarchy, one Psycho at a time.
Yeah, it's gonna get bad down there as Cantarell's decline accelerates over the next few years.
Could be good for jobs, though, if the Feds hire all the border guards that will be needed to control that situation. Probably hazard pay, though. What I'm hearing from my friends in Arizona is that it's already like a low-intensity border war. It's police and border patrol fighting against groups outfitted with military weapons.
There is way too much focus on Saudi Arabia and the Middle East when someone wants to talk about oil control.
The largest oil producer in the world is Russia.
Leaving out BABs for now may be but intentional - blame the next sell off and sell-off driven recession on the muni crisis. Then get BB to step in and rescue munis via another funky transfer mechanism that somehow benefits big banks.. just thinking what's being planned out for 2011. After all crude is already uncomfortably high and they cant risk carrying the equity rally any higher.
Look forward to nothing but food fights in Congress, especially after the new batch of critters get sworn in -- gridlock as far as the eye can see!
GAME OVER
Please deposit another 4 Trillion Quarters.
For the next 3 minutes.
Protein Wisdom has an interesting take on this .
For one of you with strong web-fu . Why when I try linking sites here using html does my user /desktop info show up in the link ?
Hey BDC Maybe some thing like this in reverse.
http://www.chrisbytes.com/intuit/activedesktop/index.html
10 words .
Mac . thanks tho .
Guess "Drag & Drop" isn't always the best way of doing stuff -- so sad for you.
Do you hit "return" after pasting the link?
Do you disable rich-text, then create a link using an HTML anchor tag such as:
<a href="http://www.somesite.com/somepage.html">site link</a>
If so, then I do not know what would cause your problem.
Do you cut&paste a URL into the comment field? If so, disable rich-text and check the HTML tag corresponding to the URL and make changes before saving the comment.
If you cut&paste text from a Word document, the text will contain extraneous style definitions, which can be seen by disabling rich-text. Suggest you only cut&paste from text documents.
I fail to see how bailing out the muni market will accomplish anything positive or help anyone except in the shortest of terms.
Bingo. It will just result in the destruction of more capital. Capital is precious, and become precious-er as it is destroyed.
The sooner we stop, the better. One way or the other, municipalities cannot go on giving insane pensions to union cops, firefighters, and teacthers, running all sorts of massive programs such as sewer at a loss, or outright giveaways like parks and libraries, etc., etc. etc. This all costs real capital (regardless of whether you call it dollars, seashells, gold, etc.)
Are you trying to say that promises to pay (more promises to pay) are no longer considered real capital?
That's a good one.
The failure to harness the promise (to toil) in the hearts and minds of the emerging generation (albeit smaller in numbers) for the 'good of themselves', encapsulates the propaganda problem of the rulers.
Which is precisely WHY the Govt will do it! After learning what a "tickle-bond" was, I totally gave up on these imbeciles!
Fear not, Douggie. Bailout Nation is obviously alive and well.
"Today's tax compromise in the US extended all expiring Bush tax cuts by two years."
Well, Mr. Borthwick, it's not exactly a done deal.
Obama apparently made a "compromise" with a minority party (the republicans), the House & Senate still belong to the majority party (the democrats).
And judging by the gnashing of teeth within the latter it's anything but a done deal.
I don't like it either...the estate tax goes up (an estate is made with after taxed dollars) so in my opinion there shouldn't even be a death tax...now there is an incentive to die early created by government? ;-)
In short...it wouldn't hurt my feelings one wit should it go down in flames at the hands of the majority...we can address all this after the next Congress is seated instead of in a lame duck session.
Yeah, let's extend the moral hazard bonds for the irresponsible state governments. Bail 'em out and watch 'em spend it again. No thanks.
The post is an informative post and well written. But, the failure of America to have enough money to save the world from itself and cover all our needs is caused by a congress that believes the way to prosperity is to kill everyone who dares to dare us.
To all of you from Pearl Harbor, I salute
no one is talking about it because the whole market/country/world is a willing participant in in this global mother of all ponzi schemes!!
Not I. Buy Silver, bitchez!
My county issued BABs to insure contruction of a large CRE project.
So, with plenty of vacant retail space, hotels with low occupancy and hundreds of homes on the market, county board decides to bond a mixed-use retail facility with 9 hotels, 400 homes and something like 200 storefronts.
So far, not a shovel of earth has been turned. My perception is that the BAB bonds were yet another means of funneling filthy lucre to favored contractors.
If we're going to spend money building things, they should at least be for the public good. In a post-industrial society, why are we even talking about "shovel-ready" jobs? We should be thinking instead of projects that would benefit all of humanity, like industrial quantities of carbon nanotubes, a space elevator, etc.
>If we're going to spend money building things, they should at least be for the public good
You make a large number of uses of the word "we".
There is no such thing as the "public"; there are only individuals. There is no such thing as the "public good": only an individual can say whether something is subjectively good or bad for him. There is no means to compare or to sum the subjective valuations of different people. There is not even a means to compare the subjective valuations of the same person at different times.
>We should be thinking instead of projects that would benefit all of humanity, like industrial quantities of carbon nanotubes, a space elevator
If those things are so needed, then why not be an entrepeneur and invest your money in them? Why should "we" think about them? What if I'd prefer having more strip joints, and no space elevator?
Very well said...what's good for one "public" might be bad for another. I think Stalin used that term a lot..."public good". And he determined which "public" would benefit.
Do you think our courts do any different?
Milestones
I think we're talking about 'shovel ready' jobs, because those are the people who were put out of work by this depression. Most of the people hip enough to make composite carbon fiber that can stretch over miles are in the 95% employed part of the 'with degree' pie chart, at present.
Construction was blown out like a popped lung during the coke-binge phase of development and now people with those specific skills (forming concrete, for example) are the ones who are ready, willing, and able to work, but are finding no game in an empty field. This sector-based UE is very obviously hightlighted in the BLS data (yeah, I know, but this is hard to fuck up) which breaks down UE by types of work and education level. Those who would have dumptruck drivers learn biochem and nanotech can feel free to put another rock in the pipe on me.
And speaking of crackheads, the last thing Cali needs is another way to issue debt, especially for CRE int oa broken market (do we really expect something other than default?).
http://www.youtube.com/watch?v=urXHWQePSYU
And getting an entire months head start is an eternity in finance. Still, muni debt is just one bit of the puzzle that makes up the imminent crisic inflection in public/private finance. The continuing implosion of the shadow system will impose its imperatives regardless of the meager and futile attempts by monetary & fiscal authorities to maintain the status quo without pain to the super seniors. As Ken Rogoff noted recently & Jim Rogers noted today, the issue is insolvency. The system has been engineered so as to impose an implied systemic failure built upon the concept that some financial instruments are 100% money good. What nonsense! And with global finance reflecting global supply chains there cannot be failure at any point along the chain without failure of the entire chain. The implied MAD concept brought to life. Marvelous that the construct that demands ultimate, complete & total failure as the mode of extortion only works when the host can maintain the parasite in a sustainable symbiosis. That is no longer possible beyond the near-mid term horizon.
Let the Lib areas of infection die a horrible death. When they take the rest of us down, maybe the Sheeple will wake up and never allow these Socialist experiments to occur again. No pain, no gain.
Fuk Kalifornia, and the horse Pelousy rode in on!
Agreed.
But why pick on the dems only?
Socialism is defined as government owning the means of production. Having the government producing charnel houses on foreign soil is also a form of socialism.
I pick on Libs - no Dems left. If we glassed all that foreign soil, end of problem.
Seems to be working OK for Canada, Sweden, etc.
"The Build America Bond program has been the municipal market's saviour..."
Ermm...
The Build America Bond program has been the municipal market's giant Uncle Suggy subsidy...
There, fixed that for ya.
If the states can't pay, cut...or declare insolvency. Couldn't care less which. Time for kick the can to end.
>If the states can't pay, cut...or declare insolvency. Couldn't care less which
True. Do bondholders even deserve to be repaid? Those who lend money to known criminals (state governments), and who contractually try to bind third parties (including the unborn) into slavery, are basically criminal accomplices.
Well it will make for a tense back nine with their reps, if they don't get repaid...don't you think?
I've seen articles on three financial blogs today saying BAB's are vital and the program must be extended. I'm utterly baffled by them. The Great Game afoot for two decades has been to allow state and municipal salaries and benefits to keep the peace in the areas surrounding LA, NYC, and Chicago, the power centers of business, as jobs are exported and public debt foots the bill for the spending. (The power-holders sure don't want to pay that bill, and won't.) If we let the Federal taxpayer foot the bill for the illusion alive in the big three, we'll be absolute hostages to the gods of the Great Game.
Sayonara Ca-li-for-nia!
Nuts!
...and Fruits and you will pay until your eyes bleed.
Glad to see BAB go. It was just another rig. Backdoor to try and end the tax exemption on munis;reline bankers pockets since they got caught red handed rigging the muni market, and give the pensions a piece of the muni borrowing market. BAB was a scam disguised as a short term crutch for states.
When all the muni structured product blew up, TOB ARS VRDN..., demand for about one-third of long-term tax exempt bonds evaporated. Rather than just live with a 50 bps. steeper muni curve, the larger firms successfully lobbied for a program that would keep issuance up. But more than just keeping the fees going, BABs changed the nature of underwriting to one that favors the more global distributional nature of the taxable market. This assured New York firms would not lose the market share of the structured product business to regional dealers.
But the even more insidious result is Washington getting state and local finance hooked on subsidies. This Trojan horse of mandates is an attack on regional sovereingty.
Now we get yet another bankster blackmail argument, just like all the other bailout blackmail- oh no, the market will freeze up!
For the sake of all humanity! Please, let's keep local finance local.
Fuck New York and Fuck Washington.
I'm just amazed by the debt carousel. Debt is not an asset, on either side of the ledger. The ability to borrow is not an indication of worth. Nations' ability to sell bonds (debt) determines their stability?
When will this craziness end? I'm ready for it to be over.
Are you kidding? Bailing out municipalities will allow the parasites a few more precious years to spike their salaries (Bernanke's forced upward adjustment in COLA bogusness - PRAISE HIM) and therefore the level of their pensions into retirement. Ideology be damned, Boomers are in full panic mode now that they've realized:
1) the likelyhood of being incinerated by a atom bomb is far less than they were told throughout their most formative years
2) no, there are no flying cars for you, you rube; you get GPS tracking instead
3) the after affect of living in constant fear of anihilation is nihilism; which means nothing means nothing so do whatever the fuck you want (greenshoots of later unrestrained greed)
4) waking up to the reality that everything they were sold was marketing bullshit (flying car? robot servant? thirty-hour work week? and global, peace time, government [one of these things are not like the others])
5) "buy the equity market dips", "real estate prices will always trend higher".
Now most are broke or, at best, bailed out. And they are pissed; and in heightened theft mode.
The Muni situation is going to be another black swan to hit us in 2011. If the fed starts to buy Muni bonds, it will be over. Because who in their right mind will even want to buy anymore US debt (including treasuries) when our own states are being funded by a centralized money printer. Inflation will skyrocket and what Bernanke said is that the elected govt. is going to have to push austerity into their budget plans (states too). If not it will be forced on us and it won't be nice.