Is Illinois Worse Off Than Greece with a Little LTCM and Bear Stearns Thrown In? In Case You Didn’t Know…

Reggie Middleton's picture

In early 2008, I warned my readers that several states and
municipalities in this country are going to run into some very rough
times, with the spectre of default definitely on the table for a few.
See Municipal bond market and the securitization crisis – part I and Municipal bond market and the securitization crisis – part 2 (should be read by whoever is not a muni expert – this newsbyte may be worth reading as well).

Of course, the highly contrarian nature of my views were (and are)
bound to bring about its fair share of naysayers, pointing to the sparse
record of actual municipal defaults. Of course, we all know the safety
of driving forward while staring in the rear view mirror, California
creating its own currency in the form of IOU’s and all… I also brought
up the risks that the CDS market posed in Counterparty risk analyses – counter-party failure will open up another Pandora’s box
(must read for anyone who is not a CDS specialist). This was done right
about the time that I also called several companies out for their CDS
(and direct) exposure to real estate, mortgage debt and municipalities –

I considered three of the four to be insolvent in 2007 and early
2008. History has shown whether I had a point or not. I rehash history
because a review of the lessons that hurt so bad, but were never learned
brings us back to the muni markets, CDS and overleveraged exposure. Is
this 2008, 2010, or some non-descript chrono-anomaly from a Twilight
Zone episode?

Illinois Municipal Debt Defies Gravity

As municipal debt issuance continues to drop alongside yields,
Chicago and Illinois continue to issue debt despite their deteriorating
credit ratings and negative outlooks.  Even as rates for AAA tax exempt
borrowers have fallen, statewide issues from budget shortfalls,
unemployment a full percent above the national average, and most
importantly for the municipal bond market, declining state revenues have
started to drive Illinois credit spreads wider than the poster child
for state profligacy, California.  Recent headlines have made it clear
that state services in this fifth largest of the US states are under

Illinois Budget Crisis Draining State Services: Bloomberg

  • State retirement liabilities are near $130 billion, Illinois holds the country’s largest pension and health care funding gaps
  • Pension debt is $90 billion, and programs are unfunded to the tune of $54 billion
  • The state’s unpaid bills have risen by $1 billion in the past year

Chicago Downgrade Raises Borrowing Costs Amid $164 Million Sale: Bloomberg

  • Chicago is planning a multibillion dollar education capital plan, which it will debt finance
  • Chicago has continued to thin out its cash reserves, and when faced
    with firing 1,200 public school employees, it instead chose to let the
    good times roll (party like its 2005)
  • Recent credit ratings downgrades may have raised the debt financing cost by 40%

Illinois Pension Continues to Borrow From Future: Sun Times

  • In January of this year, Illinois raised $3.5 billion in five year
    pension obligation notes at a tax free rate of 3.84%, most of the funds
    going to the Teachers Retirement System (TRS)
  • The pension fund usually reinvests the some of the proceeds
    from the bond sale into financial markets to try and beat the 3.84%
    interest rate, however, in 2009, the TRS fund lost 22%, even as the
    S&P 500 strengthened by 26%
  • The pension system has reached an endpoint where simply cutting
    future benefits will not be enough to get out of a fatal debt spiral

And Yet, Illinois Bond Spreads Tighten: WSJ

Perhaps the only thing more frightening than the TRS asset shortfall is the TRS asset holdings
Illinois has exposed itself to material credit risk and CRE exposure
through their CMBS holdings. I assume an astute sales team sold this to
the pension fund. For more on the profitability (for the banks) on
selling CRE products to institutions, see When It Comes to Wall Street Real Estate Funds, the House Always Wins – Even When Investors Get Slaughtered
(it’s long, but it drives the point home). TRS has also assumed (and
probably generated) material global credit risk in the OTC credit
derivatives market by underwriting sovereign CDS on government bonds.  An audit of fund holdings indicates that these positions have lost $515 million,
with the audit occurring at the end of March 2010, so it is ok to
assume that these positions have become even worse as spreads have blown
out in Europe.  For those who are not aware of my stance on credit risk
as well as the financial and economic contagion hotbed boiling in
Europe amid the rampant mis(and dis)information , see my series on the Pan-European Sovereign Debt Crisis.

Hey, Mr. and Mrs. Illinois Teacher, Reggie Middleton thinks your pension fund is picking up pennies in front of a freight train!

So, we have teacher’s pensions writing insurance on the biggest
European debacle of this century. We have same said pension buying the
debt of assets, 40% of which are probably underwater.
What was not mentioned thus far is that this very same pension has more
than 80% of its holdings considered “risky” according to a study by
“Pensions and Investments”, and industry rag – and that was in 2008,
without the benefit pending defaults in Europe and the ever higher climb
of LTVs in CRE.

Then there’s the fact that TRS is also:

  • selling swaptions,
  • shorting international interest rate swaps
  • knee deep in GNMA, FNMA instruments,,,,

and this is just from a cursory view of their holdings. They paid
over $160 million in management fees, and if I had to take a guess, they
are reaching for yield and quick returns over the prudence of looking
to preserve capital which in my opinion should be the mantra of a
pension fund shepherding the retirement funds of real people. Then
again, there I go being old fashioned again.

In addition to the market performance of the actual positions
themselves, one must ponder… If a credit event is triggered, does the
Illinois TRS have the liquid capital to make good on its CDS
obligations? When BoomBustBlog created the Sovereign Contagion Model,
who knew it left out Illinois.  If the TRS is unable to make good on
its CDS positions in the event of a tail event, it is definitely not
unfathomable that Illinois could be the domino that falls into the blow
up the CDS market.

Illinois is facing what Hayman Capital Advisors manager Kyle Bass
referred to as “The Keynesian Endpoint”.  To paraphrase, when debt
service exceeds revenue, deficit spending becomes permanent and
structural until default inevitably occurs.  Since the bursting of the
housing and credit consumption bubble back in 2008, tax revenues have
fallen, and pension liabilities continue to receive funding through debt
markets.  Using basic accounting, the gimmicks used to placate state
employees are about to come to an end.

Economic data points toward a prolonged recessionary environment for
citizens of Illinois.  While fiscal measures need to be taken to correct
imbalances in revenues and expenses, it certainly appears from the
outside looking in that policymakers have instead elected to ransack the
future with an unbearable debt burden.  Even the people these policies
are designed to benefit, public workers, will have to take significant
steps once reality hits that their pension benefits may not be as great
as once thought.  Watching the future of Illinois finances will be
interesting considering the similarity Illinois shares with the likes of
Portugal, Italy, Ireland, Greece, and Spain in that there is no
printing press to provide a quick fix for long term fiscal imbalances. 
One thing is clear, Illinois will be very dependent on debt markets, as
secular revenue growth is not coming back anytime soon.

For those who like pour over numbers and asset holdings, here is the FOIA Answer, requested by reporter Alexandra Harris illustrating TRS holdings and giving us a peak into what lies in their funds, and here are the TRS asset holdings as per the state audit.

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whiteshadow's picture

love this guy's work... anyone having a doubt abt his credibility..jus check

Quackking's picture

One very small criticism, as a copy editor - Illinois doesn't actually have '200 years of history' as a state, of course - but the general points are impossible to dispute. Excellent.

Putty's picture

As an Illinois resident (for the past 4 years), I can only hope that Illinois defaults first and either breaks all promised pensions or gets bankrolled by the wonderous federal government.  I won't stay here if there will be a slow bleed that will affect my children's education.  We moved to this flyover state from the Bay Area (frying pan into fire) giving up scenery for better schools and more amenities.  Where will we be moving next?  North Dakota though fiscally sound isn't too appealing.

StychoKiller's picture

Snow, Bitchez! (and lots of it!)

Mercury's picture

Well thank God we have the only honest and fiscally sane politician from Illinois running the country, that's all I have to say.

Buck Johnson's picture

I didn't know that they where also underwriting.  I agree with you Reggie, they will implode and the Fed won't do anything about it.  And thats because if they help this state and this one pension, then the other 49 will have their representatives fighting for a massive bailout also.  Print another 2 to 3 Trillion dollars and this money will hit the streets and we will see hyperinflation sooner than later.

AUD's picture

"As municipal debt issuance continues to drop alongside yields, Chicago and Illinois continue to issue debt despite their deteriorating credit ratings and negative outlooks."

"And Yet, Illinois Bond Spreads Tighten: WSJ"

This has me confused, is it spreads are tightening but yields falling, or are yields rising?

AssFire's picture

I'm telling you Texas won't stand for much more of the selective handouts..the states that are in trouble are those that expanded THEIR social programs and government. They all have higher state taxes due to their excesses and all that has driven it all here (if not overseas). Daaah- nobody working??

WE don't want to pay for it any more than paying for the neighbor's mortgage.

lostinmissouri's picture

When Texas secedes, I am heading there.  Or, better yet, here's hoping Missouri is smart enough to secede with you.

Jim Billy Bob James IV's picture

A good friend of mine in Phoenix said if wasn't for New Mexico, Arizona and Texas would already have seceded!  I think you can count Oklahoma in also.

AssFire's picture

Give New Mexico (and El Paso) back to Mexico. Az is on its own.. we are the Ark La Tex Oma'ns...Or ALTO, now listen to the high pitch of our anger!

AssFire's picture

Here is the platform for our Nation:

1 - Fire 95% of the military= savings $ 750 billion/year

2 - Close 95% of the prisons= savings $ 200 billion/year; keep only the most violent offenders (they were simply slaughtered during the French Revolution); repeat offenders to be used as slave labor to generate revenue for the state

3 - End "war on drugs" = savings $ 150 billion/year

4 - Legalize & tax Marijuana = revenues of $ 100 billion/year

5 - Fire 75% of government employees = savings of $ 500 billion/year; invest only in education and infrastructure

6 - Lower income tax to 18%, (25% above 2 million/yr)

7 - Quadruple investment in education (qualifiers being ability- not race)

8 - Reinstate the modern poll tax- no vote unless you pay taxes. (or at least pass the flat tax- and the tax applies to free benefits from the Gov.)

9 - Sterilize or refuse benefits to welfare recipents if the have already had a child on welfare.

10 - Shut down the mainstream media & shut down the US Congress for five years

The bottomline is there are just too many non-contributors working harder at obtaining benefits and freebies than they ever worked in a job.

Hephasteus's picture

The war on drugs is a war on the monopoly of drugs. Just as prohibition and the setting up of the Bureu of Alchahol Tobacco and Firearms was a monopolization of those things that led to 50 dollar bottles of rum and cigarrettes so loaded with addictive and cargenigenic chemicals as to be insane. Complete with a kabuki theater of crackdown that involved NOT DOING ANYTHING ABOUT returning tobacco to it's original level of addictiveness but simply buying houses for snot nosed 18 year old kids doing THE TRUTH advertisments on TV for 60k a pop.

Just like europe allows any fucking firm on the planet to price fix and manipulate any market involved in electronics and then simply taxes the fuck out of the company taking half of the ill gotten gains and buying the mayors and presidents more thugs in monkey suits and more cops.

You'll get no justice in this world ever and it will become apparent that the only pathway to freedom is to swim an ocean of status quo cops and army guys blood.

geno-econ's picture

Reggie has credibility, but somehow the collapse that is the logical conclusion to all these insights so far has not occured.  Could it be our financial policy makers are super wizards or Reggie's timing is off a  bit ?   Iam betting on Reggie ,but admit a collapse would be ugly and therefore to be avoided at all costs.   In other words ,most are in utter denial and our super wizards know it ,and manage to pull yet another rabbit out of their hat.  Reggie, sharpen your timing !   

geno-econ's picture

Reggie has credibility, but somehow the collapse that is the logical conclusion to all these insights so far has not occured.  Could it be our financial policy makers are super wizards or Reggie's timing is off a  bit ?   Iam betting on Reggie ,but admit a collapse would be ugly and therefore to be avoided at all costs.   In other words ,most are in utter denial and our super wizards know it ,and manage to pull yet another rabbit out of their hat.  Reggie, sharpen your timing !   

Careless Whisper's picture

when Tony fuckin Robbins sez prepare for the depression, you know we got problems...


Jim Billy Bob James IV's picture

I agree!!

This Tony Robbins video is the scariest thing I have ever seen, because if he is out saying this and Timmy Geithner says everything is roses... the end can not be far behind.

JR's picture

On the homefront, unlike the government front, consumers are retrenching and reducing debt.

Says Nate at Nathan's Economic Edge, “Total consumer credit is down and still falling for the first time in modern history.  Again, any price appreciation is not occurring due to American demand, it is occurring due to American financial engineering backed by government hot money injections into our insolvent financial system."

Says Nate,  "John Williams at shadow stats produces a nice looking total consumer credit chart … and how it has rolled over.”

Williams "just also updated M3 which is now contracting at 5.4%, the second largest contraction in modern history (since WWII), only behind the 5.9% contraction recorded this June.”

 And this on August 17, 2010, from the Federal Reserve Bank of New York:

Household Credit Conditions in U.S., Select States Showing Decline in Consumer Indebtedness

The Federal Reserve Bank of New York today announced the release of a new Quarterly Report on Household Debt and Credit and an accompanying web page.  The report shows that households steadily reduced aggregate consumer indebtedness over the past seven quarters.  In the second quarter of 2010, they owed 6.4 percent less than they did in 2008, the peak year for indebtedness.

Additionally, for the first time since early 2006, the share of total household debt in some stage of delinquency declined, from 11.9 percent to 11.2 percent. However, the number of people with a new bankruptcy noted on their credit reports rose 34 percent during the second quarter, considerably higher than the 20 percent increase typical of the second quarter in recent years.  

In addition, the data for selected states reveal substantial regional variations in debt and credit patterns:

  • Arizona, California, Florida and Nevada all show markedly higher delinquency and foreclosure rates than average;
  • Nevada has the highest foreclosure rate, with 0.7 percent of consumers receiving a new foreclosure notation on their credit report during the second quarter of 2010; Arizona is the next-highest, with 0.6 percent of consumers with new foreclosure notations;
  • Total consumer indebtedness is highest in California and Nevada, where average per capita debt balances are $78,000 and $73,000, respectively, compared with $49,000 nationally; and  
  • Households in states with the highest debt burdens have seen the strongest declines in their balances.

"Major declines in house prices and the continuing high level of unemployment are reflected in the various measures of household debt and credit. However, the national measures obscure substantive differences at the state level and the additional data released today show clear differences of distress among the select states for which we show data," said Wilbert van der Klaauw, vice president in the Research and Statistics Group at the New York Fed.

daneskold's picture

Not so fast there, Kemosabe.

Not all of that reduction in consumer debt is the result of consumers retrenching and paying down debt.

Please note that bankruptcies are skyrocketing despite the recent bankruptcy amendment that render debtors virtually penniless and nevertheless saddled with too much debt.

Nevertheless, a great deal of the reduction in outstanding consumer debt is the result of increasing chargeoffs of uncollectible debt.

Just as the obvious better solution to the worldwide debt is restructuring if not outright repudiation, the better solution to hopelessly indebted consumers is to wipe out all debt and give them a fresh start.

After all, isn't that laissez faire capitalism...make a bad loan, eat the loss?

JR's picture

“…the better solution to hopelessly indebted consumers is to wipe out all debt and give them a fresh start. After all, isn't that laissez faire capitalism...make a bad loan, eat the loss?”

If I am owed $100,000 on a loan, or if taxpayers are owed billions on defaulting Freddie and Fannie loans, and those loans receive a blanket forgiveness without any redress or right to defaulted property or borrower assets by the owners of the loans, that isn’t laissez faire capitalism, it is communism.

And it doesn’t work: destroy money, credit, liquidity and property rights with a big debt forgiveness Jublilee and you destroy an economy.

The carrot that makes achievement and productivity doable, as proven in America, is freedom with its by-product, property rights.   Destroy individual economic freedom and equal justice, and you destroy incentive. I mean, I am not going to work years, and knowingly loan that money to you only to have you get off scot free after a few buying binges under a system of “Whoopee" for you. And neither, I don't think, would you.

If we wish to succeed economically, we should study Solzhenitsyn, IMO, who wrote of economic and human totalitarianism in “The Gulag Archipelago,” his famous treatise on the United Soviet Socialists Republic’s forced labor under socialism with a gun– an economic system of bondage and brutality that purposely crushed incentive and up to 49 million countrymen who died , mostly by starvation, by Stalin’s hands alone.

As someone said, the last time that the Obama Administration suggested that those who regularly pay their own mortgages also pay the mortgages of those who do not pay or cannot pay their mortgages, the Tea Party movement was born.

Of course, the bankers would love taxpayer-funded debt forgiveness; it keeps the cash rolling in so they can keep cashing their bonus checks. :) 

ZackAttack's picture

No worries... our government will simply borrow $3 for every $1 its citizens don't.

Until it can't.

AccreditedEYE's picture

What does it matter Leo? Only full scale meltdown is going to cure these ills. Reggie shows us Illinois... you think that is the extent of this? How many other Pensions are playing the exact same games trying to play catch up? How many others have inadequate (to say the LEAST) managers and advisors selling garbage advice? The SEC can't replace losses. F, they can't even restore faith in the broken system.  

RockyRacoon's picture

Yeah, another case of, "What you're doing is illegal and has screwed so many people that we can't count them all.  So, stop doing that.  Thank you and goodbye."

ZackAttack's picture

or else we will issue you a *much* sterner warning.

exportbank's picture

Illinois is just like the guy sitting in First Class - they'll arrive at the crash site an HFT Milli-second before many other states. Everywhere (worldwide) the public service has been promised pensions that are (at least) double that of the private sector and almost always amount to payments of over a million dollars spread across the 20 more years the retired public servant survives. Add health-care costs for the masses to that million and we're done. If you still own a house, get ready for giant property tax hits ad new taxes- in Ontario gasoline got hit an extra 8% last month and electricity (a provincial agency) went up close to 25%. Across the world the public sector unions are pushing for tax hikes to protect their benefits at the cost of the food in you mouth.

JR's picture

It turns out those excessive  public employee salaries in Bell, California, are leading to more atrocities.  The Los Angeles Times, continuing its investigations of the payrolls of California city leaders, has found that hefty paychecks for Vernon, California, officials rival those in Bell.

The ex-city administrator, who now serves as a legal consultant in Vernon, earned seven figures in each of the past four years.

Good luck, as you imply, to all those trying to hold onto the house as property taxes go through the roof.

P.S. Vernon has only 32 residences, a larger police force than Bell with its population of nearly 40,000, and is a municipal corporation with $164,000,000 in cash and liquid assets, ruled by three generations of its founding family, termed by some: more of an organized crime locale than a municipality.  And then there's Maywood, Southgate, Cudahy and who knows how many more California cities in this whirlpool of taxpayer money going down the public drain...


Rainman's picture

As seriously messed up as Cali is, I am confident we can and will defeat all comers in the race to the bottom. This State has hundreds of newly chartered little baby Bells. 

Vampyroteuthis infernalis's picture

Good analysis. As of lately in our US society, reality is suspended again!

Sudden Debt's picture

Imagine... a American state that is worse off then a European country...

I bet some rednecks here on this site are preparing a lynch mob for you Reggie ;)


fxrxexexdxoxmx's picture

Bet some black guys kill couple of black guys tonight in Detroit or Chicago. No smile at all. Rednecks at least understand that if you kill each other you make your group so weak that you have to vote for some foreign MF based upon skin color instead of ability.

Hal n back's picture

a couple of weeks ago, Ill Rep Shakowsky was on the morning CNBC show--after she discussed the bill she introduced to give seniors another 250 (after screwing the seniors on the cpi-but then again the seniors mostly get back more than they put in) the CNBC crew asked her how ILLinois was doing with the debt crisis--she replied "fine". Asked to elaborate she said Illinois is dealing with the debt crisis by not paying bills. Huh--the entire crew asked?


I vascilliate between our elected officials being really dumb, or corrupt (I know its somewhere in the middle) or personal agenda focused. None of the 3 are great.


BTW-with a massive problems its nice to know there is no urgency in IL--legislators are and have been on recess for a while.



mnevins2's picture

I'm a lifelong resident of C(r)ook County (50 yrs) and I screamed about how Obama was worthless (did nothing as State Senator except vote "Present" - he watched while Illinois continued to crumble - and he endorsed the Todd Strogers and other crooks who were part of his "political team." Did anyone listen to me? My suburb voted 84%-16% for Obama. I was therefore not surprised that the rest of nation gave him their votes, too.

Illinois? The legislature essentially provided no budget, but said to Quinn - the hapless governor - "you decide" - and then they adjourned.

Quinn, a political gadfly (and soooo over his head!) is behind a decent amount in every poll to his Republican challenger (who is semi-worthless) and so I have no hope that anything but disaster awaits. HOWEVER, "disaster" IS a solution and will hopefully bring about genuine change. But if Quinn wins, the super-majority Dems at the capital will increase the income tax rate immediately and INCREASE SPENDING, too.

Illinois and Chicago will then succeed in driving out more productive businesses and residents. Obama is part of our problem - not part of our solution.

rapier's picture

Illionois is a political oddity. Cook county votes Democrat just because and everywhere else votes Republican because of loyalty to Abe Lincoln. So any empty suit who makes the ballot in the repective areas wins. This adds up to politicians who are slightly dumber and slightly more corupt than most other places and this slight degree of more badness has lead to the states slight degree of worse offness than many others.

America worked reasonable well when it was an empty slate and then until we became an empire, the world got complicated, and corporations mastered the technologies of manufacuring consent. Now it has stopped working. Failed government and governance has become a self fullfilling prophesy and the only common good left is bombing swarthy people in distant lands. Eventually here too.

Dirtt's picture

So.  What's the bad news?

JimboJammer's picture

Print  More  Money....

traderjoe's picture

I enjoy this site, to read up on the slow-moving train wreck that is Illinois (note misspelling in the title): 

$5 billion in UNPAID bills! Just unpaid. If that isn't a default, I don't know what is. 

How our citizenry just whistles past this graveyard, I don't get...

RockyRacoon's picture

Question:  WHO is owed the money? I'll bet there are many, many small businesses which supply goods/services to the State.  These will be the companies that will find it easier to bankrupt than sue for payment.  The old blood/turnip story.

traderjoe's picture

Yup. Lots of non-profits, small businesses, colleges.

2,000 organizations are owed $100,000 or more. 

Hephasteus's picture

That's not the problem. The problem is that cities are huge money to power and phone companies. Expect to get raped by your power and phone company very very shortly. Expect to cancel service and turn it off as you won't be able to afford the raping.

TeresaE's picture


State's vendors filing bankruptcy = lower tax revenue and fewer jobs

Only things left to tax (rent, house, food, utilities) and they will

End result, lower tax revenue, fewer jobs, implosion.

Michigan isn't far behind and I firmly believe that once the munis/state bonds start falling, they are all going to fall (to some extent) and totally domino over the other teetering states like Michigan and New Jersey.

To anyone reading this and saying, "whew, my state isn't in major trouble," I say open your eyes.

When the bankrupt states fall, the Feds are going to step in.  Where do you think they are going to go for the money? Your state.

The wheel never stops and will eventually crush us all.

snowball777's picture

What if your state is North Dakota?

Hephasteus's picture

It doesn't matter. You will either be living without power or phone or planning or doing an armed assault against your phone company. As anything that stinks of necessity get's turned into a mob protection payment.