at two of them. One is small (Maine) the other large (Texas). For the
life of me I can’t figure out why they are AAA. First Maine:
In 1972 the state of Maine created the Municipal Bond Bank (“MMB”). The
bank borrows from the public muni market and lends the proceeds to a
total of 240 municipalities for various purposes (school,water, sewer
etc). MMB is rated AAA by Fitch.
MMB has a great balance sheet. $2b in assets, only $1.47b in
debt. The conclusion is that there is $558mm of “equity”. That would
depend on how you value all of those assets. Fitch comments on the
asset quality at MMB:
Fitch
estimates that participant borrowers of at least 71% of outstanding loan
principal exhibit investment-grade characteristics. Fitch does not express an opinion as to the credit quality of the remaining underlying loans.
Huh? 29% ($600mm) of the book is not investment grade. Even loans
that are investment grade are not liquid. There would be a big haircut
to mark to market this loan book. But no need for mark to market, right?
BBB earns money off the spread on its loan book. But it is very
dependant on state and federal contributions. In 08/09 MMB got $50mm in
grant money from ARRA. ARRA is now gone.
My real concern with MMB is not so much with the asset side. It is the liabilities. Consider this maturity schedule.
Under normal circumstances this bond schedule would not be an issue for a borrower with a AAA rating. My concern is that we are not operating under normal circumstances.
Please DO NOT read these thoughts and conclude that Maine’s bonds are
not money good. THEY ARE. If you own them you will get your principal
and interest on time. My concern is that even good borrowers are
going to get crowed out. As and when this happens it will have a very
significant consequence on the economy of Maine and elsewhere.
The state of Maine has an admirable AA from Fitch. But the AAA at MMB is
the prize. In other words, the higher rating is a result of a CBO
structure. Clever.
Texas does it Texas style. Want to know why this state is
thriving while so many others are not? Some of the credit has to go to
the Texas Permanent School Fund (“PSF”). PSF is a very interesting
operation. As of the most recent report they had $24b of assets. How are
they invested? Let’s just say that Texas loves stocks:
I tip my hat to the folks at the PSF. This is a pretty aggressive style.
Consider their currency exposure. PSF is a global player.
At the end of their year they had 1,700 cars on the E-mini. If they have
a $100mm book of leveraged futures at Q-end I wonder how big they play
during the Q?
Again, I’m not knocking the PSF. I like their style. My problem is that
PSF is using the $24b as security for their guarantee business. The FSB
has its name behind a ton of school debt. The total of principal and interest guarantees came to $134b as of 8/1/2010.
Once again let me say that Texas school bonds guaranteed by FSB are going to pay on time.
FSB has deep pockets of liquidity. Texas is doing fine. My concern is
that FSB has 6X leverage of total guarantees to equity. And 64% of the
equity is invested in the global stock market in an aggressive manner.
Bloomberg reports that the peak to trough of FSB was a swing of 26%. Quite a ride:
The
fund stopped backing municipal bonds and cut its contribution to the
state last year (2009) after board-managed assets shrunk to $17 billion in March 2009 from a peak of $26 billion in mid-2007. It resumed bond guarantees in February, after the S&P 500 reached a 15-month high.
We have seen it in the recent past. A drop in stocks and FSB freezes up. When it does freeze, it forces munis to suspend new projects and scramble to refinance old ones.
A question given the last three years of history. How does an equity portfolio with an uncertain value create the certainty of a AAA guarantee?
These days, the only AAA I trust has contracts with a bunch of large men and their trusty tow trucks.
They're the ONLY AAA that has the horsepower to see us through the trouble on the road ahead. And most of them are BONDED!
the AAA Texas plan is run by ex Enron management that didn't go to jail, or die..................
AAA means 'Agency Approved Arsewipes' ...basically there's no telling when they'll turn to shit and your 'valuable' triple-A paper is only worth wiping your arse with!
....in fact I've got spare rolls of Moodys and Fitch AAA sub-prime and Lehmans for your toilets ...
...and some Munis, US Govt 30 Year Treasury and 50 year Goldman Sachs coming in stock pretty soon if anyone's interested?!!
...all AAA rated toilet paper with $30,000,000 sticker prices, yours for 30 Cents a roll
The Redlight District definition: Anytime, Anywhere, Any way. Or the District of Columbia.
The U.S. of A. is CCC but purported to be AAA.
But hey, if we get people in Iowa and Alabama high speed Internet access we will be on our way to TRUE AAA!
And when they get that same connection to the SEC I'm SURE that fraud and malfeasance on Wall Street will be looked at (*cough*).
Was that MMB?
Good work here, thanks,
- Ned
I hear quite a few arabs like buying real estate in the Us at these bargain prices, too. I mean, it is an amazing landscape.
29 percent below investment grade? By the way did you mean CDO structure? Unless they divided it up into tranches or have an implied or ecplicit backstop i dont understand the basis of the rating. Does cbo mean collateralized bond obligation? Then it makes some sense, sort of, if you.think like a ratings agency.
Big rating, no assets.
breathin in....breathin out.... ok sorry for my outburst
Yes, breathe slowly. Think nice thoughts. Then read the piece again. You think you see things, but they are not there.
bk
Fuck Davos. Fuck the criminal bankers who raped america. Fuck anybody who thinks they are gonna fuckup my GREAT COUNTRY
I was born here and I LOVE MY COUNTRY. Not the bankers, not the media, not the asshole hyenna. BUT THE COUNTRY. FROM MAINE TO FLORIDA ACROSS TO CALIFORNIA THROUGH THE HILLS OF TEXAS AND ALL THE WAY TO THE SNOWY BORDER OF CANADA.
I LOVE AMERICA
I love my Ex. Wife but that doesn't mean she gives a shit about me...
Hey, man. Take a deep breath and relax. We're on your side, okay?
God I hate these assholes bashing the beautiful USA with punk bitch attempts to discredit states.
BRUCE YOU WILL DIE BEFORE TEXAS DEFAULTS 100% GUARANTEEEEEEEED
Said twice in this piece that the bonds involved would get paid. I never said a word about default. I said that it was leverage, favorable accounting that got these AAA. I said that it was not likely that this could keep going merrily along. I was not descrediting any state. I said their FinCo's did not deserve a AAA.
We know you are Keith Olberman. I'm sorry you suddenly have a lot of time on your hands. No, you're not fooling anyone by masquerading as a Tea Partier tying to pick a fight. Get out of your pajamas and go to Davos already. I'm sure you'll be needed/loved there.
"No, you're not fooling anyone by masquerading as a Tea Partier trying to pick a fight."
They have the same playbook everyday Merc.
It's really pretty pathetic, not one brain cell between them all, maybe it's collective ;-)
Im no fucking tea party demoparty republican party.
Im something you have no fucking possible clue about.
You think you are smart is a sure sign you are a fucking idiot
BTW FUCK YOU
When you are chocking in your dreams tonight REMEMBER YOU JUST SHAT WHERE YOU EAT.
DONT FUCK WITH YOUR COUNTRY
You dont know SHIT about muni bonds. You dont know SHIT about MAINE OR TEXAS. GET THE FUCK OUT SHITHEAD
I rented your mama tonight. She didn't mention you.
If youve spent time in maine and texas they are very large tracts of natural resources and self sufficient hardy people ( relative to say New Jersey)
Come on dude trying to bash maine and texas? Get the fuck out of the USA.
NO GIRLS FOR YOU
Excellent Bruce, As usual ur reports...
Continue,
I guess that raters at SP, Fitch, Moodys grew up in the education system where everyone got a gold star or an A. It would not be PC to discriminate in any way, dontcha know?
Triple AAA: lots of dicey problems, but we're absolutely sure things will work out in the end.
yeah they are triple AAA about as much as a Moodys MBS AAA
It looked to me like the currency positions were pretty well hedged against each other. Kinda cool, really.
Texas is doing well because we never experienced the bubble in housing that so many other places did. And that is because we have few restrictions on expansion, little concern about zoning and we are the Queens of Urban Sprawl. What else are you going to do with all that prairie, build a strip mall?
Therefore, municipalites never saw the massive swings in property tax revenue that other places did. What is going to get us now is everybody and their brother is moving here...some legal, some not so much. County hospitals, for instance, are going to take the brunt of the low-income population explosion and burn through dollars at an ever-increasing clip. Add that to increasing social services in localities and the drain will start to feed on itself. It could get bad.
I have been thinking that, since everyone is moving to my side of the ship, it may be time for me to go the other way. Who knows, maybe one day Bruce Krasting will be my neighbor.
;D
A question. Can you think of a scenario where the dollar is 10% higher YoY? I can. Not a big deal.
That would cost the folks in Texas $400mm. It could go the other way and they would book a big gain.
Decent sized bet, no? A half billion roll of the dice.Where's the hedge?
No Tx for me. I'll freeze to death first.
b
Well, the hedge would be something I would do as a retail trader, not to the tune of a half-billion dollars but on a simple trade. Buy Euros, buy yen. One will go up, one will probably go down.
You're right, though, it is insane to have a basket of three currencies with all that money on the line, especially in the 4X environment we have today. I don't know what the rules are regarding having currencies in a large fund like that but I would imagine that they could trade in and out of it at will. Maybe those were just the last trades they were in at the end of the reporting period.
It is possible, then, that the manager was a real cowboy and traded in and out of currencies at will. Balls to the wall, man. I wonder what his track record is...
I was under the impression that a significant number of cross-state transplants were tax and government fatigued Californians from a bit higher up the economic ladder...
They are from everywhere. Two years ago, it was Cali. Last year, it was Georgia and South Carolina and just today, I saw an Indiana and an Illinois license plate.
Lots of New Jerseys and a few Pennsylvanias and New Yorks, too.
If you're in the medical field or oil and gas, Texas is the place for you. I just need two more years and I'm headed back to where there are trees and seasons and where summer doesn't last nine months.
Love it. Texas has been very good to me and my family but I think it may be time to step aside and give someone else my slot.
You would be welcomed in North Carolina. I'm a little biased but it's a beautiful state. Ask Bruce, he knows.
Maine: Today's AAA is tomorrow's default (and QE(n) justification).
Texas: Bluffing with deuces.
The Triple AAA's are probably based on the potential for the 2 states to tax at a much higher rate in the near future when all those casino bets lose one day
AAA is the sound you should be running away screaming if anyone offers you to invest in them.
/brings back memories of Serious Sam.