Thursday, May 21, 2009

Khalifornia crashing: Fed Tells Congress It’s Reluctant to Guarantee Munis (CMF)

Update below.
Original post:
The iShares S&P California Municipal Bond ETF closed up a couple cents at $105.16. Earlier, various issues were trading sideways ahead of Kaiser Perm's $750 mil. offering.
Two from Bloomberg:
The Federal Reserve told a congressional committee today that it is reluctant to extend guarantees to California and other municipal market borrowers struggling to sell bonds.

The House Financial Services Committee, chaired by Massachusetts Democrat Barney Frank, is conducting hearings on four municipal finance bills, including one that would give the Fed authority to guarantee the repayment of variable-rate bonds and short-term notes. Another measure would create a public finance office in the Treasury Department to reinsure $50 billion of municipal bonds through 2015. Insurers, including MBIA Inc. and Ambac Financial Group Inc., lost top ratings, limiting the value of that coverage.

The Fed is “quite concerned” about guaranteeing municipal bonds, David Wilcox, the deputy director of the Fed’s research and statistics division told lawmakers this morning. The Fed could suffer losses if it ended up holding long-term municipal securities that it had to sell to shrink its balance sheet after it provided short-term guarantees, he said.

“The Federal Reserve has important misgivings about assuming such a role in light of the potential for decisions about the provision of credit to states and municipalities to assume a political dimension,” Wilcox said. He urged Congress to “narrowly” tailor any program if it does proceed, ensuring a quick exit for the government....MORE


Geithner Says TARP Can’t Help U.S. States Solve Budget Crises

Treasury Secretary Timothy Geithner said the U.S.’s $700 billion financial rescue package can’t be used to aid cities and states facing budget crises.

The law “does not appear to us to provide a viable way of responding to that challenge,” Geithner told a House Appropriations subcommittee in Washington today. Among the hurdles: Money from the Troubled Asset Relief Program is reserved for financial companies, he said.

The Treasury chief said he will work with Congress to help states such as California that have been battered by the credit crunch and are struggling to arrange backing for municipal bonds and short-term debt.

The municipal bond markets are “starting to find some new balance and equilibrium,” Geithner said.

Still, mayors and governors must get deficits down so their cities and states can raise their own funds, Geithner said. The federal government “may be able to help in some ways, but they are going to carry the primary burden,” he said of the state and local officials.

When asked whether he could “categorically” rule out assistance to California or other states facing budget problems, Geithner responded by citing the administration’s broad efforts to help the economy heal.

“We will have to do exceptional things, as we have done already, to fix this mess,” he said. “That’s not putting on the table, or taking off the table, any specific thing.”>>>MORE

It looks like budget cuts are the only option left.
UPDATE: Great minds and all that. From ZeroHedge:

Ahrrrrnold Is Running For The Choppa
California is on its own. At least that is the conclusion based on Tm Geithner's earlier statement that TARP cash can not be used to bail out the Golden (or any other) state....

...Three observations: i) when did "the law" ever stop T^3 before; ii) If by new equilibrium Geithner means 0 then he is right, iii) isn't Barney Frank all over the task of providing US guarantees to munis for ever and ever, after extensive discussions with T3 and Dick Bove have revealed that there really is no other way to prevent the complete collapse of the world's fifth largest economy (which if the miles of empty containers at Long Beach harbor is any indication, then the world must be is in some serious trouble).

Wisconsin Democrat David Obey sums it best "We don’t want Uncle Sam to be Uncle Sucker." Of course, there is nothing that T3 and Barney would like more. Unfortunately for California, it may be too late. While its CDS has tightened recently, nothing fundamentally has changed from the time when its CDS hit well over 450 in late 2008. It is merely a matter of time before the state's risk goes back to those levels again from its current 200bps tighter price....
From FT Alphville:

Muni investors still backing California bonds

The LA Times’ Money & Co blog noted on Thursday that holders of bonds issued by fiscally-challenged California are betting that “debt repayment will be a priority at the expense of other spending.”

Tom Petruno makes his case thus:

Investors’ willingness to stay put with tax-free California bonds shows in the share prices of major mutual funds that own debt of the state and its cities, counties and other municipalities. The market value of many of those portfolios continues to climb despite the dire headlines.

Which is interesting, and begs the question: are the holders of Californian municipal bonds rather too optimistic?>>>MORE