Wednesday, February 27, 2013

Drip, drip, drip


So this will be a bit circuitous.  Some funny blog metrics of late here lead me down an old rabbit hole. Hang on tight.

Years ago a topic here was the history and impacts of the liens on unpaid City of Pittsburgh property taxes that were repackaged and soldoff to a financial entity created by a company called MBIA.  That is all a story in itself, but tangential for the moment.  Far beyond its Pittsburgh exposure, MBIA was more in the business of insuring municipal bonds. 

In the financial news of late is a new spat between the same Bill Ackman, who has been quite successful himself, with even richer investor Carl Ichan.  They have had some very public spats some may have caught.  This time the debate is  not over MBIA, but a company called Herbalife.  Again, that is tangential, but the history of Ackman's call on MBIA is in the news as a result of this new fight.  I once found and posted a copy of Ackman's old report on MBIA and have had literally tens of thousands of hits over the last month to my web site downloading it. I once even had MBIA itself write me over what I put up about their spat with Ackman, even though I really only cared because of their Pittsburgh investment in liens. Noticing the downloads just the other day got me thinking.

update: I had no idea as I typed that, but it turns out coincidentally that MBIA is in the news today with a rather dire financial outlook about its future.  That in itself may have some implications for local public finance and any local bonds insured by MBIA.  Am too lazy to go look up what debt that may apply too of late, but the bond rating of bond insurers gets imputed into the bond rating of a lot of local bond debt. 

So whatever? eh.   The thing is the MBIA's core failure had to do with a lot of interest rate risks that Ackman pointed out where mispriced at least as far as MBIA was concerned.   MBIA basically insured a lot of variable rate municipal debt and the whole market for variable rate debt was much a fiction in the end.  Bad for MBIA and few noticed.  What other interest rate risks are out there and closer to home.  Some may remember the story of the Pittsburgh Water and Sewer Authority's big variable rate bond offering.

Anyone still reading except for Paz?

So. It just got me thinking a bit. We used to talk about all the auction rate debt exposure locally a lot more. When nobody was reading I didn't care so much that I was talking such nonsense. Still, what was one of the bigger auction rate bonds floated locally? That of the Pittsburgh Water and Sewer Authority in 2008.  Have not thought about the state of the PWSA auction rate bond of late.  The very very short story is that when the market for auction rate bonds collapsed the PWSA was in a big big pickle (that is a technical term) paying 'penalty' interest rates  on their sizable bond. Rates way way above the historically low bond rates regular borrowers were able to get.  The folks who set up the bond, JP Morgan mostly, basically let the PWSA out to dry and would not back the bond in any way.  For a time I believe PNC actually did PWSA a big favor and came into back up the bonds.  You'll have to trust me because the actual explanation of all of it is way way too painful to explicate.

Even Paz has given up on me by now.. Maybe Fester is still out there..   is there any nugget of currency in all of this?

Well.  The problem with the 2008 bond was never really solved, just deferred (deferred being an unfulfilling eupemism for 'kicked down the road').  What I think is too lost in the esoterica is that the PWSA still has over $350 million in variable rate bond debt it has not been able to convert or refinance into more traditional vehicles.. and over half of the PWSA's variable rate debt is callable in 2013.  That would be this year according to my calendar!!  and basically I suspect the PWSA has little plan as to how to deal with it all. All at a time when I think the actual needs for new capital investment in water and sewer infrastructure are higher than ever.  So pure loss financial costs are not exactly a happy thought.

update2.. I swear I did not see this before I typed this all up, but it turns out that the very same PWSA debt is potentially about to be downgraded . That actually is a news item in and of itself.

In summary: this is bad. and this is big. How big?  Whatever the $$ we are talking about it potentially going to cost PWSA, it dwarfs whatever $$ was actually misused in anything and everything going on down at the police buread.  It is just so so much harder a story to tell. I bet the ink/$ ratio for the PWSA debt story will never crack a mill of coverage of whatever is going on down at the police bureau's detail office.

10 Comments:

Anonymous engelr said...

Would a problem like this be reasonably well-tackled by a public bank (if we had one, which we don't)? http://en.wikipedia.org/wiki/Bank_of_North_Dakota

Thursday, February 28, 2013 10:17:00 AM  
Anonymous MH said...

Nothing else will happen today to drive this PWSA story from the news. I think we can sure of that.

Thursday, February 28, 2013 12:20:00 PM  
Anonymous Anonymous said...

Muni Bond Tax Exemption Repeal Could Spike Borrowing Costs by 50%

http://www.governing.com/news/state/gov-muni-bond-tax-exemption-repeal-could-spike-borrowing-costs-by-50-percent.html

Thanks for all the PWSA background. It is useful.

Thursday, February 28, 2013 12:41:00 PM  
Anonymous Anonymous said...

Nothing else today?

Do you mean Luke's big announcement or Ben's contract restructuring?

Thursday, February 28, 2013 2:36:00 PM  
Anonymous NotPazOrFester said...

So. It just got me thinking a bit. We used to talk about all the auction rate debt exposure locally a lot more. When nobody was reading I didn't care so much that I was talking such nonsense. Still, what was one of the bigger auction rate bonds floated locally? That of the Pittsburgh Water and Sewer Authority in 2008. Have not thought about the state of the PWSA auction rate bond of late. The very very short story is that when the market for auction rate bonds collapsed the PWSA was in a big big pickle (that is a technical term) paying 'penalty' interest rates on their sizable bond.

Good post. One nit. You refer to the 2008 issuance as auction rate debt. This is puzzling. It appears based on the offical statement that the 2008 bonds are actually variable rate bonds. I only question this because auction rate securities are a much different animal with bigger problems than traditional VRDBs.

Thursday, February 28, 2013 4:45:00 PM  
Blogger C. Briem said...

you are absolutely correct. I was a bit loose with terms, in particular describing any PWSA debt as 'auction rate'. Of course everyone knows it was all VRDO.

Is funny actually. I once worked at Lehman Brothers which invented the auction rate market. That and I even worked on their derivative products trading floor where everything was interest rate arbitrage, but it was not what I did at all. All I saw was much more 'mundane' LIBOR based interest rate arbitrage, but it was getting ever more exotic every day. So for some time I did not fully appreciate how convoluted the auction rate market was (or wasn't as it were).... which as you point out is not the same as the variable rate problems facing the PWSA technically. It all gets to some deep questions on who had any idea where the risk was in the market, and how it was priced. Does it matter in the end? In short, the folks agreeing to those deals had no idea what risk (and what costs) they were incurring.

and not t just blame Let's not forget Upper St. Clair:

http://nullspace2.blogspot.com/2009/03/now-this-will-be-case-study-for.html

or the Port Authority:

http://nullspace2.blogspot.com/2011/02/when-bonds-hit-road.html

Thursday, February 28, 2013 10:28:00 PM  
Anonymous NotPazOrFester said...

It all gets to some deep questions on who had any idea where the risk was in the market, and how it was priced. Does it matter in the end? In short, the folks agreeing to those deals had no idea what risk (and what costs) they were incurring.

You speak the truth CB. Pricing is an important consideration. Also, who recommended all of these "hedging strategies" and why? They certainly did not benefit the PWSA ratepayers.

Friday, March 01, 2013 12:10:00 AM  
Blogger C. Briem said...

more like anti-hedging strategies......

Friday, March 01, 2013 12:17:00 AM  
Anonymous NotPazOrFester said...

From the Archives. http://www.bloomberg.com/apps/news?pid=nw&pname=mm_0308_story2.html

Saturday, March 02, 2013 2:35:00 PM  
Anonymous gutscheine zum ausdrucken said...

Nützliche Informationen,ich danke Ihnen sehr

Wednesday, March 27, 2013 7:03:00 AM  

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