Cities and other municipalities are being left out to dry as financial speculators take funds out of the bond market, reports the WSJ:
With the market for municipal bonds tumbling, cities, hospitals, schools and other public borrowers are scrambling to refinance tens of billions of dollars of debt this year, another sign that the once-safe market is under duress.
The muni bond market was hit with the latest wave of bad news Thursday, prompting a selloff that sent the market to its lowest level since the financial crisis. A New Jersey agency was forced to cut the size of a bond issue by about 40% because of mediocre demand, and pay a higher rate than expected...
As U.S. cities and towns wrestle with financial problems, investors are finding a new way to profit on their misery: by buying derivatives that essentially bet municipalities will default.
These so-called credit default swaps are basically insurance contracts that have long been available to protect holders of corporate bonds against default. They became available a few years ago for municipal debt, allowing investors to short sell—or bet against—countless cities, towns and bridges, and more than a dozen states, including California, Michigan and New York.
The derivatives are still thinly traded, but their existence has the potential to make investors skittish about the issuers of the bonds that underlie them. That has been the case for issuers ranging from Greece to Bear Stearns and Lehman Brothers during the financial crisis. When the price of this insurance goes up, nervous investors have sold off securities issued by these entities.
Conservatives see an opportunity to shred union contracts through bankruptcy court.
When the states come calling, the House must say, "No." More, it's time to amend the federal bankruptcy laws to create a procedure for state bankruptcies -- allowing states to abrogate their municipal-union contracts from the school-board level on up.
In the recent tax deal, the GOP killed off the Build America Bonds program, which had been used to cover the shortfall in state budgets.
So with states across the country facing a $140 billion shortfall next year, some experts and union advocates also see the GOP opposition to extending the bonds subsidy --despite its support from even some Republican mayors and governors -- as part of a broader scheme to bust public employee unions and wipe out pensions.
"We've got a huge bulls-eye on us," one union advocate told In These Times. "I find it profoundly ironic that [GOP] people on the Hill who say they support states rights can undermine the ability to function of all states that are facing massive fiscal crises." Union officials hope that even with a Republican-run House, the support of Republican governors and mayors joining with unions could help pass the measure next year. But don't hold your breath waiting for fiscal reality and support for more federal spending to take hold of a Tea Party-fueled GOP.
The Federal Reserve said its backstop for the commercial-paper market isn't open to state and local governments who use the source of short-term financing.
The Commercial Paper Funding Facility, which is buying the loans from corporations starting Oct. 27, ``at this time'' isn't open to municipal issuers, the New York Fed bank said in an update late today to a ``Frequently Asked Questions'' page on its Web site for the program.
The Federal Reserve announced Wednesday it will boost the interest rate paid to commercial banks on excess reserves, helping the central bank battle the credit crisis.
The move will encourage banks to keep excess reserves at the Fed because they will be earning higher interest on that money...
Congress in the recently enacted $700 billion financial bailout bill gave the Fed the power to pay interest on reserves for the first time.
The result has been a huge spike in "excess reserves", just when these funds are desperately needed to revive the economy.