Wasn't Sarah Palin just admonished by the Press for saying exactly what this is saying?!?!?!?!?
On Sep 9, 6:45 pm, Frank <[EMAIL PROTECTED]> wrote: > Government Payments to Wall Street for Auction-Rate Wreck Climb > > By Michael Quint > Enlarge Image/Details > > Sept. 9 (Bloomberg) -- Government officials are letting Wall Street > banks pull off what makers of defective cars, computers and condos > can't. After the collapse of a product banks created and controlled, > they're charging the customers for repairs. > > The customers include taxpayers from New York to California, as well > as not-for-profit institutions such as hospitals and universities. > They sold auction-rate bonds, whose interest rates were set in > periodic bidding. Since the market for those bonds began to fall apart > last year, the issuers have had to pay an extra $2 billion in > interest. > > Now the borrowers are on the hook for possibly billions more in > underwriting, legal and other costs for replacing the bonds with less > expensive debt, according to data compiled by Bloomberg. Most of the > payments are going to the same banks that ran the auctions and are > accused by New York Attorney General Andrew Cuomo and states' > securities regulators of understating the risks to clients. Investors > have been promised $55.3 billion in refunds. Taxpayers aren't getting > the same break. > > ``It's sad that taxpayers are paying the costs,'' said Christopher > Taylor, former executive director of the Municipal Securities > Rulemaking Board, an industry-controlled group based in Alexandria, > Virginia. ``If they knew what was going on, they would be indignant.'' > > Across the country, public-sector borrowers had $166 billion in > auction-rate debt. They have refinanced or made plans to do so for at > least $103.7 billion of it, or 62 percent, Bloomberg data show. > > New York's Costs > > To exit the securities, New York -- the biggest state issuer of the > debt with $4 billion -- has so far spent $138.4 million. That's equal > to the annual salaries and benefits for 900 state jobs being > eliminated because of a budget crisis, plus the cost of preschool > education for 20,000 children. > > Including the initial costs of selling auction-rate bonds and higher- > than-expected interest, the state's total extra expenses will climb to > at least $340 million, according to state data compiled by Bloomberg. > The state sells bonds to fund prisons, roads, mental-health facilities > and economic development projects. > > Ultimately, the government and nonprofit borrowers may end up paying > Wall Street billions of dollars in refinancing fees, depending on how > issuers replace the debt. If their costs were to match New York's, the > tab would exceed $7 billion, not counting higher interest rates. > > Four of the banks collecting New York's refinancing fees, Citigroup > Inc., UBS AG, Merrill Lynch & Co. and Goldman, Sachs & Co., have > settled probes into Wall Street's practice of marketing the bonds as > equivalent to cash. > > $522.5 Million in Fines > > Those banks and four others, Morgan Stanley, JPMorgan Chase & Co., > Wachovia Corp. and Deutsche Bank AG, agreed to pay $522.5 million in > fines. They also consented to refund investors stuck with securities > they couldn't sell after the banks in February ended a years-old > practice of supporting the auctions by bidding for their own accounts. > > Under the settlements, the bond issuers will be reimbursed ``all > refinancing fees'' for those sold after Aug. 1, 2007, when auctions > began failing in the corporate market, and replaced after Feb. 11. > That covers about 1 percent of the public-sector borrowings, and none > of New York's $4 billion. Alex Detrick, a spokesman for Cuomo, > declined to explain the limitation. Spokesmen for the banks also > declined to comment. > > Bailout for Banks > > ``It is unrealistic to expect that investment banks, like any other > business, would simply provide their services without compensation,'' > State Budget Director Laura Anglin said in an e- mailed statement. > > As issuers pay the banks to replace their auction-rate bonds, they are > also reducing the financial institutions' losses on the securities > that state regulators forced them to buy back. New York and others are > paying face value for old auction-rate bonds as they are replaced, > even though they are worth less. > > ``It sounds like a bailout for the banks,'' said Michael Granof, a > professor of accounting at the University of Texas, Austin. > > The effect on the banks depends on how the auction-rate bonds are > refinanced and how much their value has declined. Jeffrey Rosenberg, a > Banc of America Securities LLC analyst in New York, estimated that the > $58 billion of remaining municipal auction issues are worth 98 cents > on the dollar. That suggests a $1.16 billion loss for banks if they > held all the bonds. > > `Burdens Are Enormous' > > The costs of replacing the debt are squeezing budgets in a weakening > economy. In New York, with a projected deficit next year of $5.4 > billion, the collapse of the auction-rate market led to $37.8 million > in extra interest from February through July as rates jumped as high > as 14.2 percent from about 3.5 percent. > > New York's costs also include at least $69.7 million of interest > payments in future years, above what it expected to pay on the bonds. > > ``The financial burdens are enormous and will be felt in budgets for > years to come,'' said Arthur Levitt, a former chairman of the > Securities and Exchange Commission, in a speech Aug. 19 to the > National Association of State Treasurers in Rockland, Maine. > > Issuers are partly to blame, according to Levitt. When bankers > presented proposals for auction-rate bonds and associated interest- > rate swaps, ``skepticism took a back seat to following an investment > fad,'' he said. ``As a result, the tough questions were never asked.'' > > Auction-Rate Invention > > Bankers encouraged borrowers to make swap agreements, which were > intended to convert fluctuating auction yields into fixed rates lower > than the cost of traditional bonds. Those swaps, in which borrowers > paid a fixed rate to a bank in exchange for a floating payment, went > awry when auction costs rose while other rates fell. > > Auction-rate bonds were invented more than 20 years ago by Ronald > Gallatin, a now-retired Lehman Brothers Holdings Inc. banker. They let > companies borrow for as long as 40 years while paying short-term > interest rates set by bidders in periodic auctions. The public sector > began participating in the market in the late 1990s. > > From 2000 through 2007, local governments and operators of hospitals > and schools paid banks $650 million to market the bonds, based on > Thomson Reuters data. > > On top of that, banks charged as much as $400 million a year to run > the auctions, which they propped up by making bids for their own > accounts. > > `Money-Making Opportunity' > > In the first two months of 2006, for example, bids submitted by UBS > prevented 85 percent of the municipal auctions it ran from failing, > according to court documents in a civil suit filed in June by > Massachusetts Secretary of State William Galvin on behalf of > investors. > > When investor demand evaporated and the banks reeled from losses on > securities tied to subprime mortgages, they quit bidding. In mid- > February, the market caved, triggering penalty interest rates as high > as 20 percent. Borrowers turned back to Wall Street to refinance the > bonds. > > ``We have a money-making opportunity,'' Seema Mohanty, a former > investment banker at Zurich-based UBS and now a consultant in Pelham, > New York, wrote in a Feb. 14 e-mail disclosed in the Massachusetts > suit. ``They are desperate,'' she said, referring to issuers that > wanted to get out of the bonds. > > Government officials haven't been clamoring for relief or publicly > criticizing Wall Street. Anglin, the New York budget director, said > the market's failure was ``an almost entirely unexpected event.'' > > Saving Money > > A spokesman for New York's Democratic Governor David Paterson, Errol > Cockfield, declined to comment on the costs of refinancing auction- > rate debt or the terms of Cuomo's settlement, referring questions to > the Division of Budget. > > The budget office's Anglin said, ``We support Attorney General Cuomo's > continued efforts to examine'' the auction-rate market. > > Spokespeople for Assembly Speaker Sheldon Silver, a Democrat from > Manhattan, and Senate Majority Leader Dean Skelos, a Republican from > Long Island, also declined to comment. > > In California, Brian Mayhew, chief financial officer of the Bay Area > Toll Authority, said he doesn't fault Wall Street. > > ``My first reaction was to blame the banks for the auction mess, but > my second reaction was to remember how we saved money for five years > because of those bonds,'' Mayhew said. > > The toll authority, the operator of seven bridges in and around San > Francisco, paid 3.62 percent interest on $507 million in auction-rate > bonds before the market broke down, he said. It has saved $100 million > since February 2003, even with penalty rates. > > Now the authority is paying Merrill Lynch and Citigroup, the sellers > of its auction-rate bonds, to convert the debt. The new borrowings > cost as much as 5.33 percent. > > Never as Good > > Mayhew said he didn't switch banks because ``we think they have the > best fixed-rate desks.'' > > ``We need to move on,'' he said. ``I've got bridges to get built.'' > > For San Diego County, California, unanticipated interest since > February has added up to $600,000 a month, said Don Steuer, CFO of the > county. It also hired some of the same banks that helped issue its > bonds to get rid of them. > > The county sold $343 million of new taxable fixed-rate bonds last > month at yields of up to 6.03 percent to replace auction- rate debt > used to fund a pension plan. The old securities' cost had increased to > 6.08 percent from 5.30 percent as the market went bust. > > ``It's never going to be as good as we had it when the auction market > was working,'' Steuer said. > > To contact the reporter on this story: Michael Quint in Albany, New > York, at [EMAIL PROTECTED] --~--~---------~--~----~------------~-------~--~----~ Thanks for being part of "PoliticalForum" at Google Groups. For options & help see http://groups.google.com/group/PoliticalForum * Visit our other community at http://www.PoliticalForum.com/ * It's active and moderated. Register and vote in our polls. * Read the latest breaking news, and more. -~----------~----~----~----~------~----~------~--~---
