"Red lies", "Hysteria" & "Ben bangs Munis"

Red Lies

Yesterday the GOP came out with their plan to save $2.5 trillion smakaroos. Tyler Durden did a run down of the plan. (loved the mohair) I want to focus on just one aspect. This one is a biggie. 80 “large” over ten years. From the Republican proposal:

The legislation will further prohibit any FY 2011 funding from being used to carry out any provision of the Democrat government takeover of health care, or to defend the health care law against any lawsuit challenging any provision of the act. $80 billion savings.

Ah! The savings would come from reversing Obama Care. But from no less a source than the Congressional Budget Office comes the following estimate related to reversing the health care legislation:

CBO expects that enacting H.R. 2 (through 2021) brings the projected increase in deficits to something in the vicinity of $230 billion. (Note: H.R. 2 is the repeal of Obama Care)

So there is a $310 billion difference of opinion. My point being that anyone can spin numbers to say anything they want in D.C.

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Hysteria

The Bond Buyer had this headline today:

From the article:

Muni experts say retail demand is being undermined by a steady drumbeat of fear-mongering news stories.

Well there you go. Bloggers and folks like Meredith Whitney are responsible. There is no substance to the reports that the muni market is dysfunctional.

I was looking at the Unemployment Trust Fund. This is a complicated bit of accounting. There are some interesting rules for the States regarding their ability to borrow money from the federal government to fund UE. From CRE: (PDF)

Mechanism for Receiving a Loan

In order for a loan to be made to a state account, the governor of the state (or the governor’s designee) must apply to the Secretary of Labor for a three-month loan.

That sounds interesting. A three-month loan? Of course the loan can be rolled over. (Can’t everything?) In fact Uncle Sam gives the States a no-interest loans for up to one year! There has to be a catch, right? There is:

States still may borrow funds without interest from the FUA during the year. To receive these interest-free loans, the states must repay the loans by September 30.

So the States can borrow money at no cost provided the pay it back in less than one year. After that they pay interest. (a) Can they continue to borrow money forever and just pay the interest? (b) What is the interest cost?

(a) NO: States with outstanding loans must repay them fully by November 10 following the second consecutive January 1 on which the state has an outstanding loan.

(b) Expensive for ST money! The interest is the same rate as that paid by the federal government on state reserves in the UTF for the quarter ending December 31. States may not pay the interest directly or indirectly from funds in their state account with the UTF.

Note: The States have positive balances in their Trust Funds. They get a VERY high rate (subsidy). Now they have to borrow at that rate. The current UTF is 4%. This is expensive ST money, even for Cali.

Is this a big deal? The States borrow money from the Feds, they pay interest and they do have to pay it back. The NY times thought it was a big deal. Their headline:

This is the outstandings for the top borrowers. Does it surprise you that Cali is on top with $10b? Or that CA, MI, NY, IL & PA have a total of $23b in IOUs out to their dear Uncle? Or that the total is $41b and growing fast?

This could be fixed with the drop of a hat. Congress could just change the rules and restructure the existing UC debt into a thirty-year debt at a low coupon. That would solve this problem. But that would be a bailout. Don’t count on that. What do CA, MI, NY, IL & PA have in common? They are Blue States. The last thing the Red dominated congress is going to do is make it easy on Blue states. They made that very clear last year when they nixed the BABs legislation.

If these debts of the states are not to be restructured they must be paid back. So one can look into the future and see more supply problems in the next few years. Is that hysterical? I don’t think so. Possibly the Bond Buyer can explain how these 50 odd billion are going to be flipped to the public over the next few years.

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Ben Bumps Munis?

I think there is a sub story to the move out of munis. I saw it up close and I wonder if it not a broader factor.

After the Meredith Whitney 60 Minutes deal I got a few calls from folks who thought I may know something of this. They own Munis. And this is the "true nut" of their savings. They don’t want this to be “at risk”. So they are not sleeping at night. This not about making money. It is about not losing money.

I always ask, “Whatta you own?” “How long have you owned it?”

The answer is (in part): “NY State GOs, I've had em forever.”

Next question, “Where are they marked?”

Answer: “What does that mean?”

So this next conversation takes a bit and you end up with a broker’s statement and sure enough; the bonds are all trading at a premium. 5% bonds due in two years are trading at 106+. Why? Bernanke has pushed the under five year maturities so low that even dodgy muni paper can trade at a premium.


I say, “Sell all the stuff that is in the black and take a capital gain. Lighten up the bond funds that are underwater. If the gains and losses are equal you can move out of munis and get back to sleep.”

Response: “If I can do that at break even, I’ll dump the lot.”

ZIRP and QE were supposed to force people into riskier assets. But low interest rates have created an opportunity for long-term muni holders to now sell at a premium. It’s always easier to sell a winner after all. Especially when it's keeping you awake.