great article, thanks for the link. I'm definitely going to throw some of this stuff in there. There really needs to be some sort of check on municipalities using auction rate bonds and interest rate swaps to finance municipal projects. It's a short term solution that ends up backfiring most of the time and the tax payer ends up paying the cost.
I wish I had done like you...I bought in around $4 and didn't average down until last week around $2...didn't see any reason for the huge dip or the huge bounceback.
US$ strengthening against the Japanese yen, has been trading in a range 75-80 since last year. Bank of Japan tries to get it near 80, when they quit spending it usually starts trending back to 75.
Can you support otherwise? I've found significantly more examples where that strategy failed than examples where it worked. I haven't come across examples of municipal financing where auction rate bonds and interest rate swaps has worked out. Everything I've read has pretty much been a horror story.
This is very biased. You are never going to read a newspaper article about interest rate swaps working because it is really fucking boring and isn't news. If you want examples you are going to need to call up some random municipality and speak with the treasurer.
First of all, I don't know why you and Rabid are so intent on proving me wrong. Is it that hard to believe that the combination of auction rate bonds and interest rate swaps is toxic? Second, the research and articles I'm using aren't meant to entertain. They are very boring publications that are mostly read by academics and finance scholars. I'm not reading newspaper articles for the most part. I'm doing scholarly research. Primary sources would include law suits involving the failed financing of a municipality. I've been getting my secondary sources mostly from Westlaw. I've been using Westlaw to pull articles from scholarly journals, bankruptcy reports, and business journals. This paper is focusing on the need for regulation, I don't know why I would spend a bunch of time talking about municipal projects where these investment vehicles worked. I might pick a few to set up a counter analysis, and ultimately distinguish them from Jefferson County.
Because you keep making generalizations that aren't factually accurate but rather seem like something you'd hear on the nightly news to drum up interest in watching. And it doesn't matter if you are reading lawsuits or newspapers, deals that work--which are most of them--don't appear in either. I know multiple people that work in muni derivatives and your statement that most deals go bad isn't anywhere near accurate. I even know people that worked in muni derivatives that are going to jail as part of a bid rigging ordeal. But IYAM, the fact they're going to jail says that they were regulated enough because the acts got caught and they will be punished.
I'm talking about variable rate bonds combined with interest rate swaps. This is a specific combination that has been particularly bad. I've also read plenty of experts opinions stating that fixed rate debt is preferable for municipal finance. I don't think it's too crazy to say, especially after 2008, that we should shy away from fancy investment vehicles, derivatives, swaps etc. Sometimes it's best to pay in fixed rates and do things the right way without trying to use financial magic to fix things in the short term and gamble on what could happen with interest rates. Also the fees involved with these swaps and the insurance on the bonds is ridiculous.
anywhooo... EU saved greece. was this already built into the market or we gonna see a nice 80+ pt pop on the dow today?
You'll make a good lawyer because you really like to exaggerate things with words like "financial magic" to represent pretty simple contracts. There also is more than one kind of variable rate bond. The auction rate bonds were a stupid product that relied on liquidity in the market and more buyers than sellers to ensure rates stayed low and when you lost liquidity rates got jacked up to the maximum allowed because there were no bidders. A normal variable rate bond would have a reference rate (LIBOR, 3-month treasury, etc) and the interest rate would have declined during the financial crisis as the Fed tried to flood the system with liquidity bringing short-term rates to near 0. Other than those points I agree with a lot of what you wrote--1) Paying someone like AMBAC to insure your bonds is really stupid but at the end of the day it is the investor that is being stupid to require it and it is the investor, rather than the municipality, that is paying for it (the rates on insured bonds are lower than uninsured bonds so by insuring they are lowering their interest rate aka paying less) 2) Agreed. The fees for swaps were ridiculously high about 4-10 years ago (part of that was even illegal agreements between dealers that involved bid rigging and many of those people are going to jail). Fortunately the fees have come way down. I know people that have their pay cut by 50%-66% in the last 5 years while their desk size has been cut by 60% if that is an indication of the decline in fees. 3) Generally a fixed rate is better for a municipality because it gives them certainty of cash requirements--however it is important to note that some investors want variable rate and will accept lower interest rates for variable rate payments and in those circumstances the municipality would need to issue at variable rates and then do a swap to bring their interest payments back to fixed rates to minimize their borrowing cost and that is a major use for this market to exist.
good post. Although I can't take credit for the financial magic thing (even if you were using it against me). I ripped that phrase from a Cumberland Law Review article chronicling the debt problem with Jefferson County. I didn't know that the fee on swaps has been reduced. I'll have to incorporate that into my analysis. One of the biggest problems with Jefferson County (and after reading that article that LSU Tigers posted sounds like this happened with the Superdome financing as well) was that the insurance company the County used for its bonds was heavily invested in mortgage backed securities. When the subprime crisis hit, rating agencies downgraded the insurance company that insured these bonds, people were afraid they wouldn't get paid back on their bonds, and the auction failed.
Yes, many of the insurance companies fell in to distress because they were insuring "AAA rated" MBS which made their guarantee on muni bonds worthless. I'll just be frank and say a lot of that stuff is stupid to me and it is driven by stupid investors in the muni market. People that invest in muni's aren't trying to get rich. Muni investors are already rich and they just want to guarantee their principal and minimize their taxes. That is why insurance exists despite being arguably the lowest risk part of the bond market. To me it is stupid to buy insurance on something with such low default rates but then again I invest in HY and distressed bond markets so I mostly just laugh at people doing "credit analysis" on muni's. When the insurers started to fail the investors panicked because they had rubber stamped everything because it is AAA and insured and now they actually had to do work so they stepped away from the market. Meanwhile the banks that would have previously stepped in and bought the bonds up for auction (to keep the rates down for issuers) had their own liquidity crisis so they couldn't afford to step in and use their balance sheet. Eventually hedge funds stepped in and started buying the paper up at rates in the mid-to-high teens because they realized this was A to AA quality paper at astronomical rates and as the market settled down the rates reverted to more reasonable levels. The key thing to take from it is that it is a stupid product that works in normal or bull markets but can fail in times of a liquidity crisis. It is not reliable enough to be a good funding source for municipalities and for corporations that were investing their short-term cash in auction rate securities it is not necessarily liquid or as good as cash as they had been recognizing on their balance sheets. But at the end of the day, regulation isn't necessary and wouldn't do any good. You can't regulate stupidity and people have already learned their lesson on the product so regulating it now is something that is already taken care of by the market.
good points. However, I have to argue for some sort of regulation in this paper. I'm probably going to focus on safe harbor rules for derivatives that give them priority over collateral in bankruptcies (and other exemptions).
I've really been enjoying The Economist lately. Some of my favorite topics have been (1) How State Capitalism isn't sustainable (2) Naked short sales (3) Royal Bank of India-is it a good model or not and I always enjoy reading about our economy turning around
Have any DD? reason for the recent surge? I'm trying to find a good 1-2 yr oil play. Rencently got in CHK for natural gas which has been a good trade for me.
Go to Yahoo finance and you can get a lot of the info you're looking for. I can't really talk about it, if ya feels me playa. Just trying to help some TMBers out on a suggestion.
I think we're going to beat the growth by GDP estimates. I think it was somewhere between 2-3% for this year. Seems like unemployment is down, manufacturing is surging, real estate prices are increasing. We really need to curb austerity. We need to extend the payroll tax cuts and the Bush tax cuts.
Oh, it is. It's just that there's always some international crisis that affects the market. Like ok it was Greece for a while, now that it is finally getting solved, Iran cuts oil production to inflate prices in the energy sector. Just interesting how it goes.
for sure. And regardless of Greece, the Eurozone is still going to have some pretty big problems. I heard Italy and Spain were doing better but all the periphery economies, especially Portugal and Ireland, are still pretty fucked. They really need to enforce some sort of debt to GDP ratio with teeth.
Yes. If you're trying to sell me something you wouldn't believe how restricted I am from a compliance standpoint. My compliance dept tells me where I can hold my accounts, that I need pre-approval for every trade, that they receive trade confirms on every trade (electronically), etc. For the trades our funds execute, they need to be with approved counterparties and I don't handle the trading of those--the PM & trader do.
Yeah when I think of a Portuguese economy, nothing really comes to mind. Like, no product comes to mind that gets imported here from there. I'm sure most of it just gets sent to Spain since it's right there, but it's a port country. ... MY GOD IT'S A PORT TO GALLIC LANDS!!!!! THAT'S WHERE ITS NAME COMES FROM!!!!!! Ireland could recover, but wasn't their banking system more fucked up than ours?
I see a lot of mention about the Greece, Ireland and Portugal and their problems. Can anyone convince me that the United States will not be those countries 5-10 years from now? Why is this not getting more attention?
I think our economy and chance for recovery/chance to pay of our debt is very distinguishable from Greece, Ireland, and Portugal.
lots of herpderp on this page can we get back to pourin top shelf liquor, lighting fine cigars, and talk about how our various positions are crushing it?
They are a lot more F-ed up than we are. Japan and other countries in Europe would get there before the US
If we keep this pace, eventually we will. Eventually. Greece spends almost double what they 'earn' in a given year. They're going to default again...(they do this every so often). We will be at risk until we pass a bill to have a balanced budget in the constitution.
dont understand why libs dislike the balanced budget amendment.. it was like 2 or 3 votes away from being an amendment too if i remember correctly back in the mid 90s
Its all about where the cuts come from. Welfare or military. That puts a pillar of the dems against a pillar of the repubs.
We definitely don't need cuts right now. Austerity is about the last thing we need to do. Increased taxes and cuts in government jobs would kill our economies momentum and probably lead us back into a recession. I'm not sure what the long term solution is, but I'm confident that austerity is not the solution.
It's federal government. There's some wasteful spending in there that could be cut out, things like duplicity within agencies being one thing. I don't like how they're trying to raise taxes. It's one thing to do it, but they would do well to phase them in over time instead of one large sticker shock.
Did you see the column by Paul Krugman? Yep, slashing spending in a depressed economy depresses the economy even more, and if you don’t have to, you shouldn’t do it — you should wait until the economy is stronger. http://krugman.blogs.nytimes.com/2012/02/22/austerity-europe/
We're going to have to raise taxes eventually to et us out of all this debt, but I think they should be eased in. Increased revenue plus huge cuts on wasteful spending. Get us back to even then slowly lower taxes
So the new budget includes a 39.6% tax on dividends (if making above 200k). Wonder what it is for those making less. This seems like a terrible idea right now. As soon as the market rebounds, this happens.
What will be the new capital gains tax rate? Seems like a rate that high on dividends could push people into riskier growth stocks. %40 on dividends is too high imo.