Nearly Insolvent Illinois Just Issued AAA-Rated Bonds Via This Shady Goldman Sachs Financing Structure

Tyler Durden's picture

The state of Illinois is a financial disaster that will undoubtedly be forced into bankruptcy at some point in the future.  As we've pointed out multiple times over the past several months, the state faces a staggering $130 billion funding gap on its public pensions, a mountain of debt and $16.4 billion in accrued payables because they can't even afford to pay their bills on a timely basis.  Here are just a couple of our recent posts on these topics:

So what do you do when you're effectively a junk-rated credit risk but you need to sell another bond deal to keep your ponzi scheme going a little longer?  Well, you turn to Goldman Sachs to help you engineer a shady corporate structure that supposedly gives new bondholders first dibs on sales tax revenue (i.e. you prime other unsecured bondholders)...which is just clever enough to fool the rating agencies into giving it a AAA-rating but, as analysts and investors point out, is unlikely to mean much of anything in a bankruptcy scenario.  Per the Wall Street Journal:

Yet the nation’s third-largest city is on the verge of selling as much as $3 billion in bonds at a triple-A rating, the latest twist in the tale of cash-strapped U.S. municipalities adopting Wall Street financial engineering in their struggle to raise money in the market.


Echoing methods adopted by Puerto Rico and New York, Chicago has created a new company to sell debt, offering a tempting pledge to investors: a dedicated first claim to the city’s sales-tax revenue.


In theory, that should make the debt as secure as U.S. Treasury bonds. But there is a catch: analysts and investors say in the scenario of a bankruptcy, it is difficult to predict whether owners of the new bonds would get paid back ahead of other creditors, pensioners or even police and emergency services workers.


The deal tests whether years of near-zero interest rates will send yield-starved investors into complex bond structures. And Chicago—with a school system that has teetered near bankruptcy and greater expenses than its revenues—could still face a funding gap down the line even if it manages to lower its borrowing costs, analysts say.


Thornburg’s Mr. Ryon said Chicago’s new entity doesn’t deserve separate credit ratings from the city’s other debt. “It’s a bit of smoke and mirrors,” he said.

Of course, anyone with half a brain should be able to realize that for Goldman's structure to be effective it would necessarily mean that other outstanding Illinois bonds would have just been put in a subordinated position and should therefore be worth less.  That said, per the chart below, legacy ILS bondholders still seem to be pretty optimistic about their future recovery potential.

But while the jury is still out on whether this financing ponzi scheme will be effective at priming other bondholders or is truly nothing more than "smoke and mirrors" designed to fool the always gullible rating agencies, you can rest assured that other failing states like California will line up to take advantage of similar schemes in the near future...

Other cities and states will be watching Chicago’s bond sales. Illinois passed a special statute allowing the city to issue the bonds, and now other municipalities in the state can do the same.


States including California, Nebraska and Rhode Island have passed laws in recent years aimed at giving bondholders first claims on some taxes even if the issuer is in financial distress. Illinois and Michigan have also proposed similar laws.


Investors say municipalities with weaker financials will continue to try to woo bondholders with proposed safeguards, especially with the market rattled by Puerto Rico’s restructuring.


“The idea is to provide a little more reassurance to potential creditors that they’ve got first crack at the money,” said Glenn Weinstein, a Chicago attorney at Pugh, Jones & Johnson P.C., who has advised the city in the past.


At the same time, Mr. Weinstein said, “if you don’t have financial difficulties and your credit is good, you don’t need this.”

...all of which means that when the municipal ponzi scheme, with their $5 trillion in unfunded pension liabilities, finally goes bust it will be even worse than expected.

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falconflight's picture

Isn't this the same model employed by more powerful thieves named states and the US Gov't?

God Emperor's picture

They should have all those lefturds selling their useless asses.

How nice would be to have a LIVE-stock market.

Would be filled with millennials. And some has-beens like washed up Hollywood entertainers

WWE Maria Kanellis Leaked Nudes PART II

Stuck on Zero's picture

Will there be anyone left in Illinois to pay sales taxes?

jcaz's picture

Nope, but that's not a problem-  Goldman will just underwrite a newer, super-secret AAA rated Illinois muni based on french fry revenues from McDonalds......

I intended that to sound absurd, but I bet there is someone within the bowels of GS working out that very structure as we speak......

MonetaryApostate's picture

They do have a live stock market, you can find it under Craigslist under Help Wanted, just apply for a job & the blank check bankers will be happy to trade you some toilet paper with ink on it for your sweat equity.

Since 2009 alone the ultra wealthy running America have printed over $551 Trillion dollars, & they can loan out 90x that, think about it hard!

shamus001's picture

That crap is where your brokerage is pumping your 401k peeps!  Enjoy the bloodbath!

BennyBoy's picture


Goldman really helped Greece using these financial gimmicks.

johngaltfla's picture

Goldman Sachs?

Illinois financing?

Do I smell a CDO of a CDO, aka, Synthetic CDO? Freaking awesome.

Shemp 4 Victory's picture

I'm sure this is all just industry standard practices, so nothing is likely to go wrong.

For some reason, though, the phrase "sack of shit loans" comes to mind...

Chuck Walla's picture

This totally misses one essential point. A NEW BUREAUCRACY! Some place to stash even more friends and cronies and opens new avenues for theft and graft. AND they get to sell bonds!


That Rahm is a criminal genius. No wonder he fit so well into the Obama machine.

hedgeless_horseman's picture


Not so fast!


You actually gotta read the debenture, and the indenture on the debenture, as well as the offering.  Then look at the underlying assets, the municipal tax payer...


How about some IOUs from Cleevon  J. Washington, III, a 22 year old African-American gang member and one-time  (almost four hours) Chicago Uber driver that needs to raise money, fast, to make the payments on his 22"s from Rent-A-Rim?  He be pretty much confident in da prospects for some guvment assistancez.  They're priced just under 5% yield, zero coupon,  30 year term, and A.A.A. rated!!!

buzzsaw99's picture

i like the way you talk.  [/frank,  sling blade  ]

silverer's picture

We're in the final inning folks, and wait...wait... look at that hit! I haven't seen a can go that far this season! Wow!

mkkby's picture

Not even close.  Chicago hasn't even started their crypto currency offers.  Then bonds on that.  Then futures on that.  Then rehypothecate everything out to 1000x leverage.

Ponzis only end when investors get smart.  As you can see, sheeple still have more money than brains.

I'm buying popcorn futures.

buzzsaw99's picture

so goldman sachs can cram down and subjugate-subordinate existing bondholders and creditors at will?  then get moody's to stamp the whole shit sammie AAA?  Then they get a huge xmas bonus?  must be nice.

youngman's picture

Goldman Sacks does not celebrate Christmas....jus sayin

venturen's picture

everyday is American Christmas for them

hongdo's picture

How long before these new bondholders get crammed down by next years group?

Lanka's picture

I thought everyone was leaving Illinois.

Francis Marx's picture

plenty of fools to buy out there

buzzsaw99's picture

i hope they enjoy litigation.

ted41776's picture

too big to jail

JustPrintMoreDuh's picture

Fuck BTC gotz to getz me some of dem sweet Bondz

toady's picture

You gotta diversify your bonds nigga....

Irish Yoga's picture

Let Jamie and Lloyd play roulette with their printing machines and think they rule the world. As Sun Tzu said, when your enemy is defeating themselves, don't interfere.

Kyddyl's picture

Fannie Mae and Freddie Mac just got a nice new bailout at taxpayer expense via the new tax reform. Too many are watching the dog and pony show with the orange clown to notice. So why not this?

buzzsaw99's picture

you let them hold a buffer and they will just pay themselves bonuses ala franklin raines.  they should be kept barefoot and pregnant at all times.

silverer's picture

Time for Illinois to pass the "Property and Asset Confiscation Tax". Everyone in Illinois that voted for a democrat deserves it.

TeethVillage88s's picture

Total Gross Domestic Product for Illinois (ILNGSP)
2016: 791,608 Millions of Dollars, Not Seasonally Adjusted, Updated: May 11, 2017

Real Total Gross Domestic Product for Illinois (ILRGSP)
2016: 692,453 Millions of Chained 2009 Dollars, Not Seasonally Adjusted, May 11, 2017

Not sure we can believe GDP/GNP, Inflation, or Unemployment data.

Unemployment Rate in Illinois (ILURN)
Oct 2017: 4.7 Percent, Not Seasonally Adjusted, Updated: Nov 17, 2017

Real Median Household Income in Illinois (MEHOINUSILA672N)
2016: 61,386 2016 CPI-U-RS Adjusted Dollars, Not Seasonally Adjusted, Sep 13, 2017


Per Capita Personal Income in Illinois (ILPCPI)
2016: 51,817 Dollars, Not Seasonally Adjusted, Updated: Nov 17, 2017

This is Condeming Graph for Population, Demographics, since populations grow each year, annual growth, yet Employment Graph/data in Illinois is worse than "Flat"... What is going on!!

All Employees: Total Nonfarm in Illinois (ILNA)
Oct 2017: 6,040.4 Thousands of Persons, Seasonally Adjusted,
Nov 17, 2017

Illinois Employment level is the dame today as in Oct 2000, 6 Million People...

- So are people fleeing?
- So are people just going on Welfare?
- So are there alternatives to work, welfare that are growing ... like Black Market Labor?! Of Course!!

Herdee's picture

Goldman Sachs has the Greek expertise on swindling the ECB. The morons that worked at the ECB were had the financial intelligence of Alfred E.Newman. Come to think of it, Newman is a little smarter.

Bobportlandor's picture

This is putting the taxpayers, existing bondholders and creditors in jeopardy you would think one of them would sue.



Bunga Bunga's picture

Just in time to add to your 401k.

Hubbs's picture

Wait a minute. In the event of default, isn't this ex post facto  theft from the other senior bond holders?


PS: Tylers, be sure to let us know who winds up holding the bag on this one.



CRM114's picture

No, since the existing bond holders were given no guarantees that new bond might not be placed ahead of them. So, not theft, but certainly a good reason to get rid of existing IL bonds.

Secret Weapon's picture

If this is the crap they are going to pull it is a very good reason to get out of all bonds.  The issuers cannot be trusted not to throw the current bond holders under the bus. 

Joebloinvestor's picture

The new Venezuela model.

TeethVillage88s's picture

Israel looks good. They have it under control. Fun to look at data, search websites.

Amount Outstanding of Total Debt Securities for All Issuers, All Maturities, Residence of Issuer in Israel (TDSAMRIAOAIIL)
Q1 2017: 246,315 Millions of US Dollars, Not Seasonally Adjusted, Updated: Sep 18, 2017

silverserfer's picture

Soros and his free shit army can buy them all

DonGenaro's picture

'cause when I think good/safe investment, I think Illinois bonds

TeethVillage88s's picture


Trend in Mortgage Debt is up, Trend in MBS is up, and employment in FIREs is above 2008.

*** Mortgage Debt Outstanding, All holders (MDOAH)
$14.590 Trillions of Dollars, Not Seasonally Adjusted, Sep 26, 2017 (Trend $200 Billion below 2008, but is not good thing)

All Employees: Financial Activities (USFIRE)
Oct 2017: 8,483 Thousands of Persons, Seasonally Adjusted, Updated: Nov 3, 2017, (Trend higher today than 2008)

hooligan2009's picture

presumably this bond subordinates all salaries and pension claims as well as all existing debt. are the ratings agencies downgrading these since they have a lower claim on debt servicing?

this is the same as CDO cubed and any arranger needs to be on the hook in the event of default for all affected debt, from the primary to the lowest tranche.

hedgeless_horseman's picture



There will be no hooks. 

joebren's picture

And SHAME on any ETF's & fiduciaries who buy this trash.

Stormtrooper's picture

"The state of Illinois is a financial disaster that will undoubtedly be forced into bankruptcy at some point in the future."

Stopped reading there.  States are essentially sovereign nations.  They are not subordinate to any other government.  The states created the Federal government, which is their agent, not their superior.  The states could, if they choose, abolish the Federal government by calling an Article V Convention and passing one Constitutional amendment to eliminate it.

States CANNOT GO BANKRUPT.  They can only default and have done so numerous times in history.  Get your facts straight.

TeethVillage88s's picture

Contributions to the Chicago Fed Midwest Economy Index: Illinois Contribution: Consumer Spending Sector (CONSUILM683SFRBCHI)
Oct 2017: -0.03775 Index Standard Deviation, Seasonally Adjusted, Nov 30, 2017

Hm... what does it mean? Any thing above Zero is an above average contribution to the Index.

Contributions to the Chicago Fed Midwest Economy Index: Illinois Contribution: Manufacturing Sector (MANUILM683SFRBCHI)
Oct 2017: 0.10487 Index Standard Deviation, Seasonally Adjusted, Nov 30, 2017

Contributions to the Chicago Fed Relative Midwest Economy Index: Illinois Contribution: Manufacturing Sector (RMANUILM683SFRBCHI)
Sep 2017: 0.13211 Index Standard Deviation, Seasonally Adjusted, Oct 31, 2017

so much for service sector:

Contributions to the Chicago Fed Midwest Economy Index: Services Contribution (SERVICESM683SFRBCHI)
Oct 2017: -0.08332 Index Standard Deviation, Seasonally Adjusted, Updated: Nov 30, 2017

Contributions to the Chicago Fed Midwest Economy Index: Illinois Contribution: Services Sector (SERVILM683SFRBCHI)
Sep 2017: -0.00165 Index Standard Deviation, Seasonally Adjusted, Updated: Oct 31, 2017

just wondering about the differences in these data points, which data to use... which data serves our purpose?

Honest John's picture

What's Goldman"s commission in all of this?  It's probably a major rip off for taxpayers. 

Rick Cerone's picture

I wouldn't buy this shit paper.

bshirley1968's picture

Nobody in the world better to loan money to than a government (local, state, or federal).  They will tax the hell out of their citizens and if they have to, they will collect the revenues at gun point.

"Full faith and credit!"

Just look at Greece.  Dead ass broke and banks lined up to loan them more.