I don’t pretend to be a financial wizard, but even I know this article bodes not well for our state’s fiscal health.

Auction-Bond Failures Roil Munis, Pushing Rates Up

    Bonds sold by U.S. municipal borrowers with rates set through periodic auctions failed to attract enough buyers as banks including Goldman Sachs Group Inc. and Citigroup Inc. that run the bidding won’t commit their own capital to the debt. Rates on $100 million of bonds sold by the Port Authority of New York and New Jersey, with bidding run by Goldman, soared to 20 percent yesterday from 4.3 percent a week ago, according to data compiled by Bloomberg. Presbyterian Healthcare in Albuquerque and New York state’s Metropolitan Transportation Authority also experienced failures, officials said… What began three weeks ago with too few bidders for auction-rate debt backed by relatively small entities, such as Georgetown University and Nevada Power, has widened in recent days to include large issues of state governments, such as New York state’s Dormitory Authority. The Dormitory Authority had five auctions for seven-day securities scheduled today and tomorrow for the City University of New York. The authority also reported failures of auction bonds sold on behalf of Memorial Sloan Kettering Cancer Center and the University of Rochester.

As of this evening, you can add the NY State Thruway Authority to that list of entities presiding over failed bond offerings. Meanwhile, Spitzer has given Wall Street an ultimatum. (I wonder if they’re still scared of him?)

Updated: Somewhat off topic, here’s an op-ed by Gov. Spitzer on the federal government’s role in predatory lending appeared today in the Washington Post.

Updated again: Back on topic, the NYT’s Paul Krugman explains about these particular bonds,

    These securities seemed like a good deal for borrowers despite the fact that they contain a penalty clause: if an auction fails, the interest rate the borrower pays jumps up. (The Port Authority, which had a failed auction last week, just saw the interest rate it pays leap from 4.3 percent to 20 percent.) You see, there weren’t ever supposed to be failed auctions, so the penalties weren’t supposed to be relevant.

Okay… if Richard Brodsky doesn’t get up on a table and bang his shoe over this, he’s missing a great opportunity in his war on the stupidity (not just the corruption) of the state authorities. Then again, isn’t everyone in Albany complicit in the state’s overreliance on borrowing? Just like our national politicians currently running for president, though, I’m sure everyone in Albany will say hoo coodanode? and refuse to address the underlying systemic fiscal foolishness in our state and country.

5 thoughts on “Ruh-roh.

  1. Simon St.Laurent

    Ruh-roh is right. I didn’t expect these kinds of troubles to reach municipal bonds at all, and especially not this fast.

    Reading the article makes me wonder how sane this particular aspect of municipal finance is – but yikes!

  2. Ellen Post author

    Here’s a further explanation of what it means…

    The reason for the failures is that the broker dealer refused to put up their own capital to complete the auction. This is an indication of extreme fear or perhaps worse, a lack of investment capital to fund “normal operations”, i.e. operations that were commonplace only a few months ago. Either way, this is another sign of an increasing stress in the credit markets and points to much larger looming problems ahead.


    According to a report by Bank of America, 80% of all auctions of bonds sold by cities, hospitals and student loan agencies were unsuccessful yesterday.

  3. Robinia

    Sigh. Quite a few threads coming loose. From some of what I’ve been reading, the bond auctions were not ever expected to fail (just like housing prices were not expected to fall), therefore, those penalty rates were never suppposed to be a problem, and so not planned for.

    Apparently, the modern, innovative financial services system has quite a way of talking out of existence any lingering thought of risk in borrowing that we might have had. Remind me why we had such trust?

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