Monday, November 24, 2008

Next Bailout Might Be Your Local Government

By now, you're probably sick and tired of hearing about government bailouts... but a new bailout looming on the horizon doesn't appear to be getting much exposure on the tube, which strikes me as odd, since it may bankrupt more than one municipality.

Check out this November 22/2008 story in the LA Times:
"Credit market freeze may claim local governments as victims"

As the dreaded ARMs (Adjustable Rate Mortgages) start coming due in January of 2009 that many are predicting could create a new tide of foreclosures from skyrocketing interest rates, seems that few have realized there is another variable-rate financial instrument in common use by many States, cities and municipalities that could create new havoc on December 1 of this year. To give you an idea, here's a brief excerpt from the story:
The government agencies at risk issued a hybrid municipal bond known as a variable-rate demand note. The payouts on many of these issues have been driven sky-high by the credit crisis.

The situation prompted California Treasurer Bill Lockyer and 19 municipal treasurers to ask Friday for an emergency Federal Reserve program to restore liquidity to the malfunctioning market and force rates back down.

Without government intervention, there will be higher costs for taxpayers, more budget woes for localities and higher obstacles for crucial infrastructure projects...

The variable-rate notes were sold mostly to money market funds. The bonds carry maturities of up to 30 years but pay short-term interest rates that can be reset as frequently as once a day.

Until recently, the resets were not a problem for issuers. The dysfunctional credit markets, however, have exposed them to rate increases no one ever anticipated.

The Los Angeles Metropolitan Transportation Authority, for example, says the rate it is paying on $132 million in variable-rate notes has soared to as much as 12%, from as little as 1%. That's a difference of as much as $1.2 million in interest a month. The MTA says it may also have to pay $50 million to retire interest-rate swaps it purchased to hedge against interest-rate changes on the original notes.

For those who really think taxes are only going up on the wealthy per the Obamaplan, I heard there's someone looking to sell you a cool bridge.

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