Up until now, the concept of states filing bankruptcy has been a moot point. According to various legal precedents, basic definitions of sovereign law, and the U.S. Constitution, it simply couldn't happen. Up until now...
Path Is Sought for States to Escape Debt Burdens
By MARY WILLIAMS WALSH
New York Times
January 21, 2011 Page A1
Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.
Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.
But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government's aid...
Zero Hedge has already weighed-in on this article, rather succinctly, I might add: "NYT Reports States Looking For Ways To File Bankruptcy, Muni Bondholders To Be GMed." (Diarist's Note: If Naked Capitalism Publisher Yves Smith posts anything on this over the next couple of hours, I'll provide an update.)
NYT Reports States Looking For Ways To File Bankruptcy, Muni Bondholders To Be GMed
01/20/2011 22:34 -0500
A few days ago we reported that Newt Gingrich was pushing for legislation to allow states to file for bankruptcy, "allowing Them To Renege On Pension And Benefit Obligations." As we speculated back then "obviously what this means for equity investors in assorted muni investments is that a complete wipe out is becoming a possibility, as Meredith Whitney's prediction, which everyone was quick to mock and ridicule, is about to come back with a vengeance." Sure enough, this most recent development in the states' path to insolvency was quickly ignored as it was not a dipping mushroom cloud that could be bought. Until tonight: the NYT has just rehashed the post in an article that would not only validate the Whitney thesis if true, but make a Cramer-Bove out of everyone who has been caught on tape in the past two weeks kicking and screaming that there is no chance in hell the carnage predicted by the scourge of Citigroup (and yes, back in 2007 everyone said that Citi could never fail either). From the NYT: "Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers." Which means that up to $3 trillion in muni debt has a high probability of being GMed, precisely as we predicted: "proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government's aid." Oh, and since all this constitutes an EOD, readers are strongly urged to re-read the primer on what pervasive state bankruptcies will mean for muni CDS (hint: the MCDX is cheap).
I've been posting diaries on this subject for quite awhile, and as recently as this past Saturday: "So Much For So Few, Yet So Little For So Many."
We also received a slew of brutally negative pieces of information concerning the many ways by which state and municipal budgets are being nothing less than eviscerated, all but insuring even more draconian funding cuts at the local level for the foreseeable future: "Crushing State Budget Cuts Wiping Out Stimulative Effects of Tax Deal."
On top of the "crushing" state budget cuts, however, we're just now learning that, thanks to our new Republican House of Representatives: "States Will Soon Have To Start Paying Interest on Their Massive Unemployment Borrowing," David Dayen, FireDogLake, 1/10/11.
It doesn't stop there folks; you see, the municipal bond sector is getting brutally hammered in the marketplace, in general: "Illinois Seeks To Issue $8.75 Billion Bond To Pay Overdue Bills As Muni Issuance Market On Verge Of Shutdown," Zero Hedge, 1/13/11.
As I noted in my diary from December 8th, 2010, respected pundits are telling us that: G.O.P. Is Executing Plan To 'Bankrupt' States, 12/8/10
The truth is, many U.S. states and municipalities are currently posting everything in red ink. And, the Federal Reserve could step in and help, but apparently, Ben Bernanke won't give Main Street the the time of day nor the steam off of his piss, let alone a real bailout.
And, here's an excerpt from another post, from just eight days ago: Is Our "Recovery" Becoming A "More Insidious Social Crisis?"
Here's DDay, over at FireDogLake on Monday, telling it like it is in state budget hell: "Crushing State Budget Cuts Wiping Out Stimulative Effects of Tax Deal"
Crushing State Budget Cuts Wiping Out Stimulative Effects of Tax Deal
By: David Dayen
Monday January 10, 2011 11:01 am
...In a state where the budget woes have, by some estimates, grown more dire than even those in California, it seems that months of inaction might at last be overtaken by some combination of timing (elections are far away) and fear (the state's national reputation and bond ratings seem to be sinking as fast as its debts are mounting).
In a moment when states around the country are wrestling with withered revenues, Illinois faces a deficit of at least $13 billion; more than $6 billion in unpaid bills to social service agencies, schools and funeral homes; the most underfinanced state pension system; and growing signs of concern from bond investors.
Between California and Illinois, you're looking at about $45-48 billion dollars to balance budgets, between tax hikes and program cuts. The anti-stimulative effect of that almost totally wipes out the $55-60 billion in stimulative measures that aren't just extensions of current law in the tax cut deal.
That's not a commentary on how the tax cut deal could have ended state budget crises (although an innovative policy solution could have at least put that in motion and at lesat begun to set up some counter-cyclical fund so states don't have to contract during recessions). It's more a commentary on how economic forecasters assumed major growth from this tax cut deal, even though it's almost entirely composed of poor stimulus and would be overwhelmed by budget cuts at the state and probably federal level. Austan Goolsbee likes to talk up the stimulative power of that tax cut deal, but he's looking at it in a vacuum. Fiscal policy in 2011 and 2012 is still very likely to be contractionary, and nobody in Washington is arguing for that to change. Vain hopes of "stimulus" seem very odd, in this context.
More on this from Zero Hedge: "More Bad News For States: State Revenue Plunges By 31% In 2009 To $1.1 Trillion As Spending Increases," 1/5/11
Meanwhile, Newt Gingrich is jumping into this fray HERE in, "Newt Gingrich Pushing Bill To Allow States To File Bankruptcy Allowing Them To Renege On Pension And Benefit Obligations," Zero Hedge, 1/10/11
Some unpleasant news for pensioned workers who believe that their insolvent state will be able to afford ridiculous legacy pensions in perpetuity. According to Pensions and Investment magazine, Newt Gingrich is pushing for legislation that will allow insolvent states to be taken off bailout support and file bankruptcy, in the process allowing them to renege on pension and other benefit obligations promises to state workers. And if there is anything that will get government workers' blood pressure to critical levels, it is the threat that money they had taken for granted is about to be lifted, courtesy of living in an insolvent state (pretty much all of them). And obviously what this means for equity investors in assorted muni investments is that a complete wipe out is becoming a possibility, as Meredith Whitney's prediction, which everyone was quick to mock and ridicule, is about to come back with a vengeance.
As Nicole Bullock just noted in the Financial Times, millions of Americans would be brutally affected (and/or are already being brutally affected), via cutbacks and funding deficiencies in pension funds and Medicaid programs due to any action bearing any semblance to a state bankruptcy: "States warned of $2,500bn pensions shortfall."
US public pensions face a shortfall of $2,500bn that will force state and local governments to sell assets and make deep cuts to services, according to the former chairman of New Jersey's pension fund.
The severe US economic recession has cast a spotlight on years of fiscal mismanagement, including chronic underfunding of retirement promises.
"States face cost pressure, most prominently from retirement benefits and Medicaid [the health programme for the poor]," Orin Kramer told the Financial Times. "One consequence is that asset sales and privatisation will pick up. The very unfortunate consequence is that various safety nets for the most vulnerable citizens will be cut back."
And, as today's New York Times' lead also informs us: "Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions..."
The article does note: "It would be difficult to get a bill through Congress, not only because of the constitutional questions and the complexities of bankruptcy law, but also because of fears that even talk of such a law could make the states' problems worse."
And, it's possible that our federal "lawmakers might decide to stop short of a full-blown bankruptcy proposal," opting for something along the lines of what was established to guide New York City through its fiscal crisis in 1975, which was the Municipal Assistance Corporation.
But, call it what you wish for political purposes, there are many synonyms for the word: "bankruptcy."
As the article also points out, if governors are seeking "more leverage in bargaining with unionized public workers," a GM-style bankruptcy would certainly fit the bill.
And, much like the aftermath of the GM bankruptcy, and it's devastating impact upon the United Auto Workers, today's Times' article notes these words from AFSCME's legislative director...
"They are readying a massive assault on us," said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees. "We're taking this very seriously."
Meanwhile, the folks over at Citigroup and Bank of America aren't exactly missing a meal, now are they?
"Twisted economic priorities," indeed!
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I can already read the diary comments in coming months where the DKos audience is told how Main Street will benefit from state bankruptcies...and, of how many jobs this will save.
IMHO, the problem with all of that kabuki is this: We have twisted economic priorities which are sold via a twisted narrative in the MSM, and then parrotted throughout the blogosphere as such, too.
The real question, IMHO, is this: Since when did Bank of America and Citigroup become more important to our nation than California, Illinois and New York?
I must've missed that memo. But, thanks to the folks over at the NY Times today, they're being quite community-minded as they reprint it.