A few days ago we reported that Newt Gingrich was pushing for legislation to allow states to file for bankruptcy, "allowing Them To Renege On Pension And Benefit Obligations." As we speculated back then "obviously what this means for equity investors in assorted muni investments is that a complete wipe out is becoming a possibility, as Meredith Whitney's prediction, which everyone was quick to mock and ridicule, is about to come back with a vengeance." Sure enough, this most recent development in the states' path to insolvency was quickly ignored as it was not a dipping mushroom cloud that could be bought. Until tonight: the NYT has just rehashed the post in an article that would not only validate the Whitney thesis if true, but make a Cramer-Bove out of everyone who has been caught on tape in the past two weeks kicking and screaming that there is no chance in hell the carnage predicted by the scourge of Citigroup (and yes, back in 2007 everyone said that Citi could never fail either). From the NYT: "Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers." Which means that up to $3 trillion in muni debt has a high probability of being GMed, precisely as we predicted: "proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid." Oh, and since all this constitutes an EOD, readers are strongly urged to re-read the primer on what pervasive state bankruptcies will mean for muni CDS (hint: the MCDX is cheap).
From tonight's NYT:
Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.
But... but... the Paul Krugmans at the CBPP just said that not only do states need more debt, but their pension funds are sure to generate 8% returns. In perpetuity and then some.
Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.
So basically, GM? Thank you Steve Rattner.
House Republicans, and Senators from both parties, have taken an interest in the issue, with nudging from bankruptcy lawyers and a former House speaker, Newt Gingrich, who could be a Republican presidential candidate. It would be difficult to get a bill through Congress, not only because of the constitutional questions and the complexities of bankruptcy law, but also because of fears that even talk of such a law could make the states’ problems worse.
Lawmakers might decide to stop short of a full-blown bankruptcy proposal and establish instead some sort of oversight panel for distressed states, akin to the Municipal Assistance Corporation, which helped New York City during its fiscal crisis of 1975.
Still, discussions about something as far-reaching as bankruptcy could give governors and others more leverage in bargaining with unionized public workers.
“They are readying a massive assault on us,” said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees. “We’re taking this very seriously.
You can read the rest here. It is pretty self-explanatory.
Fast forward to 2013 when Goldman of American PIMCO Lynch, Jefferies Stanley Tabak, BlackRock Morgan and Citibank of Rangoon all win the mandate to IPO the government's $100 billion stake in the bankrupt state of California, preceded by a 10,000% 5 day market melt up in which every single short share in the world is recalled by State Street. And the official spin by the Palin administration: "this is a huge stamp of approval and confidence by the communist capital markets in the capability of Brian Sack's solitary Bloomberg terminal to manipulate each and every asset price to levels not even Jim Cramer ever thought possible."