Saturday, October 11, 2008

California to Feds: Got a Spare $7 Billion?

California to Feds: Got a Spare $7 Billion?

Add the Terminator to the long list of people seeking a handout from Henry Paulson. Late on Oct. 2, California Governor Arnold Schwarzenegger sent a letter to the U.S. Treasury Secretary saying he may need a $7 billion short-term loan from the federal government to help the state make its payroll at the end of the month.

The governor's outstretched hand is just the latest sign of the severity of the financial vice squeezing the nation (, 9/29/08). Everyone from small business people to homeowners to the largest state in the nation is finding it difficult to get a loan. "Right now this credit crunch impacts just about everyone who wants to borrow," says Doug Charchenko, head of the fixed-income department at broker Wedbush Morgan Securities. "New issues have not been able to get into the market. Institutions aren't buying bonds, they're hoarding cash."

Such a federal loan to a state would substantially broaden the federal government's efforts to stem the credit crisis—and could well lead to similar requests from other strapped states. Jennifer Zuccarelli, director of public affairs at the Treasury, confirmed that California’s request had been received but would not comment further on whether it is under consideration or when a decision might be reached.

Municipal Issues Seize Up

The $700 billion question is whether the bailout bill passed by Congress (, 10/3/08) this week will restore confidence in financial markets and get investors buying again. "Hopefully this recovery plan will end the paralysis in credit markets and allow the state to conduct its short-term borrowing," says Thomas Dresslar, a spokesman for California Treasurer Bill Lockyer.

"There's a lot of disruption in the market," adds David Hitchcock, the head of municipal finance at credit rating agency Standard & Poor's. "That could change any day."

Municipal bond insiders say that while there is some interest from small investors looking to purchase municipal bonds that are already trading, the market for new issues has almost totally dried up. That's because there is no sign that banks, insurance companies, or other institutional investors are jumping back into the market yet. Matt Favian, managing director of Municipal Market Advisors, a research firm, figures some $15 billion in bonds from more than 150 municipal issuers are waiting to be sold. "To the extent people are more confident with banks, to the extent it helps confidence, [passage of the bailout bill] should begin to open up the markets so issuers can issue bonds," he says.

Where Are the Underwriters?

The frozen state of the municipal bond markets (, 10/1/08) is a function not just of the lack of investors but also of the difficulties faced by many of the key players in the underwriting industry. Major investment banks that issued municipal bonds, including Bear Stearns and Lehman Brothers, are out of business. Municipal bond insurers, such as MBIA (MBI) and Ambac, saw their own credit collapse earlier this year when some of the riskier new investments they had been covering began to implode.

California's cash crunch is a symptom of its poor financial management in recent years, analysts say. The state has had multibillion-dollar shortfalls between its revenues and expenses dating back to the last recession in 2001.

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