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...it was safe to go back in the water...:p
Let's see now...to solve a problem with a financing instrument that they didn't fully understand or appreciate the risk implications of using [auction rate securities] municipal officials embrace yet another financial instrument [variable rate demand notes] that they didn't fully understand or appreciate the risk implications of using...
Deja vue all over again? And this horror-picture video replay is coming so soon on the back of the last screening...:eek:
“This was like round two of the great financial crisis of 2008,”... “We were under the impression we had taken care of the problem.”
The $479 billion market for the securities, whose rates are typically reset by banks every day or week, is turning into a quagmire for local officials who embraced a financing strategy they didn’t fully understand. Federal Reserve Chairman Ben S. Bernanke said last month that U.S. taxpayers may wind up as the buyers of last resort for the debt, known as VRDNs.
Bernanke Frets as Variable Notes Strip Taxpayers in N.Y., Texas
April 16 (Bloomberg) -- Houston’s deputy controller, James Moncur, figured last May the fourth-largest U.S. city escaped the unraveling credit markets by refinancing some of its $1.8 billion of auction-rate bonds.
Instead, Houston wound up paying 15 percent interest on the new securities, not the money-market rates city officials had anticipated. The so-called variable-rate demand notes backfired when investors fled the market in October, forcing the bank that had guaranteed the bonds, Brussels-based Dexia SA, to buy them.
“This was like round two of the great financial crisis of 2008,” Moncur, 56, said. “We were under the impression we had taken care of the problem.”
The $479 billion market for the securities, whose rates are typically reset by banks every day or week, is turning into a quagmire for local officials who embraced a financing strategy they didn’t fully understand. Federal Reserve Chairman Ben S. Bernanke said last month that U.S. taxpayers may wind up as the buyers of last resort for the debt, known as VRDNs.
“A large volume” of variable-rate demand notes were forced back to banks and “exposed the vulnerabilities of the VRDN market, raising questions about the desirability of its continuation as a significant vehicle for municipal finance,” Bernanke said in a March 31 letter to Representative James Moran, a Virginia Democrat...
...VRDNs, like auction-rate bonds, offer borrowers short-term interest costs on longer-term debt because rates on the notes are reset at regular intervals. Auction-rate securities fell apart in February 2008 when bankers who had provided support for two decades abandoned the market, stranding investors with notes they couldn’t sell and borrowers with annualized interest as high as 20 percent.
Dozens of local governments sold VRDNs to pay off their auction-rate obligations. Lower-rated borrowers in the variable- rate market are required to have a guarantor, called a credit facility provider, who promises to buy bonds investors don’t want. Interest rates are set by banks at a level they expect investors will accept.
The market lost favor among municipalities this year as costs to guarantee the bonds increased and issuers incurred unexpected charges to get out of their privately negotiated transactions...
...Houston agreed to pay the 15 percent annual rate for 60 days, Moncur said. Harris County, Texas, later bought $118 million of the city’s taxable VRDNs and the rate is currently 6.9 percent, he said. Houston is the Harris County seat.
Banks, reeling from almost $1.3 trillion in credit market losses since the start of 2007, raised the cost for providing guarantees as much as 10-fold, Concord, Massachusetts-based Municipal Market Advisors said in January.
Some borrowers that want to refinance VRDNs are stuck since the bonds are “often paired with interest-rate swaps that would be quite costly to unwind because many of the swaps are now underwater,” Bernanke said.
Municipalities use swaps -- private agreements in which a borrower and another party agree to exchange interest rates -- to create fixed-rate obligations by joining them with variable- rate debt. If the arrangements go awry, issuers have to pay fees to terminate the contracts...
...State and local governments have asked the U.S. government to provide guarantees for VRDNs as costs of bank assurances rise. U.S. Representative Barney Frank’s Financial Services Committee is writing legislation to help create a new backstop.
Houston’s decision to convert to variable-rate debt has drawn criticism from Councilman Peter Brown, who said officials shouldn’t have agreed to floating-rate debt with a 15 percent penalty rate, given the turmoil in financial markets...
April 16 (Bloomberg) -- Houston’s deputy controller, James Moncur, figured last May the fourth-largest U.S. city escaped the unraveling credit markets by refinancing some of its $1.8 billion of auction-rate bonds.
Instead, Houston wound up paying 15 percent interest on the new securities, not the money-market rates city officials had anticipated. The so-called variable-rate demand notes backfired when investors fled the market in October, forcing the bank that had guaranteed the bonds, Brussels-based Dexia SA, to buy them.
“This was like round two of the great financial crisis of 2008,” Moncur, 56, said. “We were under the impression we had taken care of the problem.”
The $479 billion market for the securities, whose rates are typically reset by banks every day or week, is turning into a quagmire for local officials who embraced a financing strategy they didn’t fully understand. Federal Reserve Chairman Ben S. Bernanke said last month that U.S. taxpayers may wind up as the buyers of last resort for the debt, known as VRDNs.
“A large volume” of variable-rate demand notes were forced back to banks and “exposed the vulnerabilities of the VRDN market, raising questions about the desirability of its continuation as a significant vehicle for municipal finance,” Bernanke said in a March 31 letter to Representative James Moran, a Virginia Democrat...
...VRDNs, like auction-rate bonds, offer borrowers short-term interest costs on longer-term debt because rates on the notes are reset at regular intervals. Auction-rate securities fell apart in February 2008 when bankers who had provided support for two decades abandoned the market, stranding investors with notes they couldn’t sell and borrowers with annualized interest as high as 20 percent.
Dozens of local governments sold VRDNs to pay off their auction-rate obligations. Lower-rated borrowers in the variable- rate market are required to have a guarantor, called a credit facility provider, who promises to buy bonds investors don’t want. Interest rates are set by banks at a level they expect investors will accept.
The market lost favor among municipalities this year as costs to guarantee the bonds increased and issuers incurred unexpected charges to get out of their privately negotiated transactions...
...Houston agreed to pay the 15 percent annual rate for 60 days, Moncur said. Harris County, Texas, later bought $118 million of the city’s taxable VRDNs and the rate is currently 6.9 percent, he said. Houston is the Harris County seat.
Banks, reeling from almost $1.3 trillion in credit market losses since the start of 2007, raised the cost for providing guarantees as much as 10-fold, Concord, Massachusetts-based Municipal Market Advisors said in January.
Some borrowers that want to refinance VRDNs are stuck since the bonds are “often paired with interest-rate swaps that would be quite costly to unwind because many of the swaps are now underwater,” Bernanke said.
Municipalities use swaps -- private agreements in which a borrower and another party agree to exchange interest rates -- to create fixed-rate obligations by joining them with variable- rate debt. If the arrangements go awry, issuers have to pay fees to terminate the contracts...
...State and local governments have asked the U.S. government to provide guarantees for VRDNs as costs of bank assurances rise. U.S. Representative Barney Frank’s Financial Services Committee is writing legislation to help create a new backstop.
Houston’s decision to convert to variable-rate debt has drawn criticism from Councilman Peter Brown, who said officials shouldn’t have agreed to floating-rate debt with a 15 percent penalty rate, given the turmoil in financial markets...
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