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Stockton, CA bankrupt: Expect Cyprus like solution for bond holders
The Washington Times ^

Posted on 04/02/2013 6:05:54 AM PDT by outpostinmass2

It is not surprising that they quickly found the source of their pain, the bond holders; those money loving, rich old white guys who know nothing but greed. It is their fault that huge lifelong pensions and free healthcare for life, regardless of how long you worked for the city has not turned Stockton into the utopia it should have been. It is amazing how greedy some people are, they simply don’t care about their fellow man.

In a case that will most likely go to the US Supreme Court, the municipal bondholders will be pitted against the California Public Employee Retirement System. I believe it safe to assume that the bondholders will lose their investment a la Cyprus, as they accepted the risk of doing so when they purchased the bond, unlike the retirees who were given government guarantees.

As is the case in Europe, sticking the inevitable losses of an institution gone wild, money will flow out of the system like water through a sieve if (when) the bond holders are declared to be the losers. Both corporate and retail (individual) investors hold a combined total of nearly four trillion dollars in municipal bonds. What will happen when they find that that “safe” investment is about as safe as a bank account in Cyprus? Where will they take their investment dollars?

Contrary to popular leftist belief, most bond holders are not rich Wall Street investors. In reality, over 75 percent of outstanding municipal bond securities are owned by retail investors. While that may sound sterile, like some rich guy who doesn’t need the money, these are the people who worked their whole lives without a guaranteed pension and lifelong healthcare to supplement social security. These people, who in many cases are

(Excerpt) Read more at communities.washingtontimes.com ...


TOPICS: Crime/Corruption; Government; News/Current Events; US: Massachusetts
KEYWORDS: bonds; pension; pensions; stockton; treasuries
Dump municipal bonds
1 posted on 04/02/2013 6:05:54 AM PDT by outpostinmass2
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To: outpostinmass2

When you purchase a debt obligation (like a bond, or a certificate of deposit) issued by an entity that lacks the wherewithal to pay you back, you lose your money. Anything else, including deposit insurance, is Socialism. I am not opposed to deposit insurance for banks, but it is pure and simple socialism, invented in the New Deal by Socialists.

It has some utility in the system, but it ought to be limited to small amounts per depositor.


2 posted on 04/02/2013 6:13:15 AM PDT by babble-on
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To: outpostinmass2

They ‘Cyprus Solution’ would be the proper one for Stockton Muni bond-holders. Bankruptcy, with liquidation of assets and payment basis that.

No bailouts from taxpayers


3 posted on 04/02/2013 6:13:18 AM PDT by PGR88
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To: outpostinmass2

The Welfare State will continue as long as it can tax, borrow and steal other peoples’ money to fund itself. In Stockton, the Welfare State no longer can tax or borrow, so its now going to steal — screw the bondholders to keep as much of the pensions in place as possible.


4 posted on 04/02/2013 6:15:20 AM PDT by Opinionated Blowhard ("When the people find they can vote themselves money, that will herald the end of the republic.")
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To: babble-on
When you purchase a debt obligation (like a bond, or a certificate of deposit) issued by an entity that lacks the wherewithal to pay you back, you lose your money.

I don't think that's the issue here. There's no doubt the bondholders will lose.

The question is: will the pension obligations (payments to the California retirement system) trump the bondholders? The City of Stockton owes money to both -- despite the fact that a good part of the money borrowed from bondholders went to meet obligations to the state pension fund.

I haven't followed all the details, but the bankruptcy court has basically said that state law (requiring the remaining pension obligations to be paid first) trumps federal law (which requires all of the creditors to be considered). That means the bondholders have to bear the burden, while the pension plan is made whole. Since their extravagant pensions are part of the reason Stockton is in bankruptcy, you can see the problem.

This is effectively what happened with GM: the federal bankruptcy court screwed all the secured bondholders and instead gave most of GM's assets to the unions. That's the point of the article: the government is flouting a century of precedent in bankruptcy law to achieve its own ends.

5 posted on 04/02/2013 6:43:32 AM PDT by justlurking (tagline removed, as demanded by Admin Moderator)
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To: outpostinmass2
The view of the judge in this case is laughable. The city has taken the position since March of last year that bond holders take the brunt of any cuts.

But let's take a peek behind the curtain. Wells Fargo worked with the city to issue $125 million dollars in bonds in an effort to raise funds to pay down the debt owed to Calpers - debt created when Calpers made bad investments during the dot com bust. In the event that a city is unable to pay their debt (at the time, Stockton was assessed roughly $200 million dollars out of the losses), Calpers has been ‘working’ with cities to forestall repayment of the debt and only pay the ‘interest’ on the debt, or in reality, what Calpers promises the return on investment will be (roughly 8 percent.)

To the city, the bond issue with Wells Fargo was a godsend - the bond debt would only be at 3 percent interest. Not only was it less than half of the interest demanded by Calpers, but through some nice accounting trickery, they could purchase some of those bonds with retiree funds and receive interest as well.

The house of cards came tumbling down when the accounting tricks were uncovered during an audit of the bonds by insurers, who not only demanded that retiree funds be divested of the bonds, but further, that the city immediately repay all interest it received off of the bond purchases.

At the same time, California legislators enacted laws to ensure that Calpers debt was first in line to receive any payment. Stockton, which was looking to discharge the last of the Calpers debt through another bond issuance, was shocked to learn that insurers wanted just over ten percent, evaporating the ‘savings’ on the debt.

The council basically gave an ultimatum: Insure our retiree debt obligation bonds, or we'll default on the other bonds. And this is the environment in which the judge takes the bond insurers to task for not negotiating in good faith.

6 posted on 04/02/2013 6:51:43 AM PDT by kingu (Everything starts with slashing the size and scope of the federal government.)
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To: justlurking; kingu
Great analysis from both of you. What surprises me is that if the courts do rule that CALPERS must be made whole; that it is the bondholders who must take the haircut, that absolutely nobody is considering the consequences of such a decisions.

1. No municipality, ( possibly even the state itself) will be able to borrow again except at rates that are much higher than now..and even if the new bondholders demand covenants to protect them..you can't guarantee that future courts will uphold them. Stockton may never be able to return to the debt markets again...for many years.

2. How will Stockton be able to pay its FUTURE payments to CALPERS....the city will soon die...who then is gonna pay..?

We may be seeing the first example of the Margaret Thatcher maxim here in America.."socialism stops when they run out of other people's money"

7 posted on 04/02/2013 7:32:50 AM PDT by ken5050 (My tagline has mysteriously vanished...)
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To: babble-on
I am not opposed to deposit insurance for banks,

The FDIC is a joke. As banks fail they will not have enough money to cover the losses. Right now they allege they will cover each separate account up to 250k, e.g., held in one name, held joint with right of survivorship, and held with beneficiary. When push comes to shove they'll probably only honor one account and not up to 250k as they claim. That's if they cover anything.

8 posted on 04/02/2013 7:39:40 AM PDT by ladyjane (For the first time in my life I am not proud of my country.)
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To: ken5050

2. How will Stockton be able to pay its FUTURE payments to CALPERS....the city will soon die...who then is gonna pay..?
+++++++++++++++++++
Bingo. We are at the beginning of the death spiral not the end. But a death spiral nevertheless.


9 posted on 04/02/2013 7:43:17 AM PDT by InterceptPoint
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To: ken5050
Half of the muni bond market in California are issuances to help cover the CalPERS debt. The other half pretends that they are for school improvements, water improvements, etc, but in reality are just more covert borrowings to cover CalPERS debt.

And while I tend to say the ‘dot com bust’ era, if I recall correctly, the actual trigger event was the forced divestiture of CalPERS from anything having to do with South Africa (including dumping a huge number of Coca Cola shares.) That's when the major losses started, and it just cascaded through the dot com bust (where CalPERS was directed to invest in California businesses.)

Which provides a good example how investing through legislation is a pretty bad idea.

The worst idea, however, is skirting around the requirement that cities have a balanced budget by slipping retirement debt off of the balance sheets into the CalPERS retirement fund, and not requiring full payment of any benefits each year.

Far easier to promise part of a future budget (hopefully after the offender has left office) and let them figure out how to make good on the deal.

Oh, and just in case people think that the simple answer is to dissolve the city, California law (financed in large part by public employee unions) ensures that CalPERS must be paid off before any other creditor.

10 posted on 04/02/2013 7:44:21 AM PDT by kingu (Everything starts with slashing the size and scope of the federal government.)
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To: outpostinmass2
The net result is that ALL California bonds will be treated as junk bonds (regardless of whether the bond rating firms lower their ratings or not), and municipalities across the US will have to pay extremely high rates of interest to attract buyers for their bonds.

Expect a domino effect across the US.

11 posted on 04/02/2013 7:44:23 AM PDT by PapaBear3625 (You don't notice it's a police state until the police come for you.)
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To: outpostinmass2

So, did they put their union obligations ahead of their bond holders again?


12 posted on 04/02/2013 7:46:09 AM PDT by MrB (The difference between a Humanist and a Satanist - the latter admits whom he's working for)
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To: outpostinmass2
Contrary to popular leftist belief, most bond holders are not rich Wall Street investors.

Popular leftist belief holds that anybody who has a nickel more than you is a rich Wall Street investor - and deserves to have it taken away.

13 posted on 04/02/2013 7:47:56 AM PDT by Mr. Jeeves (CTRL-GALT-DELETE)
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To: Mr. Jeeves

Contrary to popular leftist belief, most bond holders are not rich Wall Street investors.
Popular leftist belief holds that anybody who has a nickel more than you is a rich Wall Street investor - and deserves to have it taken away.


It is actually worse than that. Leftist, “If you work in the government, union, college you are us; everyone else them...”


14 posted on 04/02/2013 7:50:59 AM PDT by outpostinmass2
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To: kingu

The case is likely to end up before SCOTUS..the question being if state bankruptcy law trumps the federal law..gonna be interesting..to hear the liberals scream about “states’ rights..” yet, as we’ve discussed, if they win..ultimately they LOSE, and BIG time..because they won’t be able to borrow a farthing..


15 posted on 04/02/2013 8:10:32 AM PDT by ken5050 (My tagline has mysteriously vanished...)
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To: ladyjane

What you say is what SHOULD happen. Large deposits should be hit with losses. People with money to invest need to be aware of risk, and a bank deposit is a risky asset. The bank may lose money on its assets and not be able to pay you back

But in fact, the Socialist dream you desire is in fact exactly what does happen. No depositor, regardless of size, has ever lost a penny in a deposit at an FDIC insured bank. Socialism is what you want, and socialism is what you’ve got.


16 posted on 04/02/2013 10:23:39 AM PDT by babble-on
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To: babble-on
Large deposits should be hit with losses.

Sounds like you don't have much saved in the bank. Everyone with more money than you have in the bank should lose it, right?

17 posted on 04/02/2013 12:48:02 PM PDT by ladyjane (For the first time in my life I am not proud of my country.)
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To: chuckles; Diana in Wisconsin; Boogieman; BipolarBob; yldstrk; nodakkid; Aquamarine; BenLurkin; ...

ping


18 posted on 04/02/2013 12:50:06 PM PDT by dennisw (too much of a good thing is a bad thing Joe Pine)
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To: outpostinmass2

I sold today.


19 posted on 04/02/2013 12:52:18 PM PDT by BipolarBob (Happy Hunger Games! May the odds be ever in your favor.)
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To: kingu

Thanks for the dissection of CALPERS


20 posted on 04/02/2013 12:57:04 PM PDT by dennisw (too much of a good thing is a bad thing Joe Pine)
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To: ladyjane

I have my money with a SOUNDLY MANAGED bank, and I know how to read a balance sheet and assess the risk of an asset portfolio.

And I don’t believe in socializing banking losses, placing private risk losses on the shoulders of taxpayers who were not taking those risks and not reaping those rewards in the “good” times of the bubble economy.


21 posted on 04/03/2013 6:47:37 AM PDT by babble-on
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