Sunday, May 10, 2009

Bonds gone bust

More on PWSA bond deal in the Trib: SEC may sue city bond deal adviser. You can read the allusion to potential litigation in JP Morgan's quarterly SEC filing. (see the section near the bottom subtitled "Part II Other Information") Why is this happening? Looks like the SEC under Obama is upping its enforcement budget.

The filing says the the SEC is looking at litigation against JP Morgan for past practices in their municipal bond business.. a business that has the local Pittsburgh Water and Sewer Authority in a world of hurt. In fact as I pointed out last fall , up in Erie the school district there has been suing JP Morgan over the same exact type of deal. What I don't understand at all, politics or not, is why the PWSA is not considering suing JP Morgan for it's deal gone bad. The deal here is a whole lot larger than the Erie deal (Erie's swaptions were for $37 mil) and the losses and fees incurred as a result are proportionally larger as well. Have they even asked JP Morgan for any restitution?

Lest anyone think this is all just an artifact of the whole financial crisis or just some politics associated with the mayoral campaign... which seem to be the only defenses of the PWSA...A must read column from Bloomberg really applies to the bond business here: Magic, Mumbo-Jumbo Were Used to Sell Muniland Swaps. That's Bloomberg's title verbatim for the record, not anything I made up. Again, that column is also from last fall... It's talking about Erie's swaption deal, but it could have been about the PWSA's for all intents and purposes.

More explanation of what happened in Erie is from another fall article in the Erie Times: What did public pay? No time to go poking around in Pacer... anyone know if that suit really exists and what its status is?

If you read the Trib article you see quotes like this from the PWSA folks: ""Now is not the time to enter the fixed-rate market."". That is saying that now is not a good time to refi a municipal bond and implying they may need to wait until they get a better rate in the future. Well, there may not be any better times ahead. See this from Forbes just the other day on the lurking risks to muni bonds.. each of those things can only impact interest rates upward. And that is before we get into the inflation risks some are expecting as a post-stimulus hangover sets in.


and just for those who thought my comment on potential bankruptcy for Pittsburgh in the CP last week was unwarranted. Take a look at the growing talk of municipal bankruptcy across California and elsewhere. I have pointed out in the past that from debt point of view, the City of Pittsburgh is in far worse shape than the City of Vallejo California, currently in a bankruptcy proceeding.


Blogger Bram Reichbaum said...

"What I don't understand at all, politics or not, is why the PWSA is not considering suing JP Morgan for it's deal gone bad."

Politics or not?

Drug addicts rarely sue their drug dealers. Number one even if the drugs are killing them they feel they need them too much, number two having bought the drugs in the first place is legally problematic as well.

Sunday, May 10, 2009 12:47:00 PM  
Anonymous MH said...

The Vallejo precedent may not work for Pittsburgh. California always gets to dump its garbage on the rest of the country. If you don't believe me, rent "Pearl Harbor".

Sunday, May 10, 2009 4:51:00 PM  
Blogger EdHeath said...

Perhaps the PWSA is waiting to sue JP Morgan Chase Citibank WaMu Bank of America Shearson (they have all been merged by the Treasury Department, right?) until after a certain event, in less than a couple of weeks (nine days, to be exact). That’s right, I am talking about Mexican-American War day.

Sunday, May 10, 2009 6:33:00 PM  

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