The Chicago Penalty

Chicago Pays Price to Get the Deal Done

Comparisons on the Bond Buyer in regards to Tuesday's offerings show Chicago Schools Pay Price to Get Deal Done.

The top yield of 5.63% on a 25-year maturity landed 285 basis points over the Municipal Market Data's triple-A benchmark.

While the board's rating remains in investment grade territory, its yields aren't.

Tuesday's MMD scale Tuesday put a mid-level, triple-B rated credit at a 3.78% yield on a 2039 maturity, underscoring just how severe a penalty the district paid. The Chicago Board of Education is rated between the BBB-minus level and A-minus.

Secondary trades on the board's $6 billion of debt jumped 140 basis points in recent weeks with 10-year paper trading around 250 basis points over MMD and 15 year paper trading at 300 basis points over.

The two tranches offered a C series for $275 million and an E series of $20 million in green bonds. Both carried a general obligation pledge plus an alternate revenue pledge of state aid.

The Penalty

Not only did Chicago have to pay a 285 basis point penalty over top rated bonds, it paid 185 basis points over similarly rated bonds even though the bonds contained an alternate pledge of state aid, and even though Illinois law does not "yet" allow bankruptcy.

Why?

Default risk.

Rauner pledged "The taxpayers of Illinois are not going to bail out the city of Chicago, that ain't happenin. But there are things we can do to help them restructure and get their government and their schools turned around, and I'd like to help them.".

Illinois taxpayers should commend Rauner for that stance.

Few Institutional Buyers

Here's a pair of telling comment from the article about who may be taking the risk:

"The 2035 is a discount structure, that typically signifies to me that you got some alternative buyers looking for some pop on the run, so they will try to trade on the headline news," said a Midwestern trader. "The structuring had a fairly deep discount. Only $10 million in the 2035, a little telling on the premium structure, which tells me you only have a few institutional buyers."

"The question that is on everyone's mind is did the Kroll rating do anything? Overall, it has wide spreads but you can really tell by the dollar amount who the buyers are," the Midwestern trader said.

Is this similar to the institutional shun and dump of GM bonds ahead of GM's bankruptcy?

Recall that high-yield GM bonds were dumped on unsophisticated mom and pop investors ahead of that debacle.

No Miracles Coming

I repeat what I said yesterday in Yield on Chicago School Bond Offering Hits 5.63%; Debate Over Risk; Miracles Not Coming; Bankruptcy the Sensible Option.

How is a state that has a $9 billion budget deficit hole going to bail out a single school district that is $1.1 billion in the hole?

The obvious answer is that it won't and can't. There are no miracles to be had. The Chicago Public School system is bankrupt. All it will take to trigger bankruptcy is for the legislature to allow just that.

That said, the law does mandate that parties in a chapter 9 bankruptcy dispute attempt to negotiate a settlement.

Realistically speaking however, history shows that unions will not concede benefits as they believe them to be sacrosanct, even though court decisions prove otherwise.

Detroit made a huge mistake time-wise attempting to forestall the inevitable. Rauner needs to give an out of court settlement a chance, but for the sake of Chicago and Illinois, that chance should be of limited duration.

Bankruptcy the Only Sensible Option

Since downstate voters will not want to bail out Chicago, we may easily be approaching the point the Illinois legislature realizes it has no choice other than to allow municipalities the option of declaring bankruptcy.

This won't come easily for the legislature, but it's the right thing to do. Upstate vs. downstate politics may be enough to tip the tide.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot

ECB Squeezes Greece on Collateral; Humorous Lies of the Day; Capital Controls Likely Soon

Funding as Long as Banks Stay Solvent

The amusing headline of the day comes from ECB Executive Board Member Benoit Coeure who told Greek newspaper Kathimerini on Wednesday in an interview ECB to Fund Greek Banks as Long as They Stay Solvent.

The European Central Bank will continue to provide liquidity to Greece's banks as long as they remain solvent and have sufficient collateral, ECB Executive Board Member Benoit Coeure told Greek newspaper Kathimerini on Wednesday in an interview.

He said imposing capital controls was "not a working assumption" for the ECB, while speculation about Greece leaving the euro was "out of the question."

Coeure failed to say that Greek banks are "solvent" (using the word loosely) only as long as they get funding.

Humorous Lies of the Day

1. Capital controls not a working assumption 
2. Greece leaving the euro "out of the question" 

Does Coeure really believe he is fooling anyone with such nonsense?

Greek Leaders Under fire for Ordering Councils to Hand Over Cash

Greek mayors are upset (and no one can possibly blame them) for the government ordering cities to turn all their cash over to the central government.

The Financial Times reports Greek Leaders Under fire for Ordering Councils to Hand Over Cash.

Greece’s anti-austerity government faced the first serious rebellion over its handling of a deepening fiscal crisis after it caved in to international pressure and ordered local authorities to hand over their spare cash.

A group of prominent mayors reacted furiously to the move on Tuesday, which followed repeated demands from Greece’s official creditors, saying it amounted to an illegal seizure of municipal funds by the Syriza-led central government. The mayors said the order by decree violated the constitution and they threatened legal action in Greece’s highest court.

George Kaminis, the non-partisan mayor of Athens, said the order was a blow to the independence of local government and could “asphyxiate” the normal running of the capital. “Apart from the fact that this move is clearly unconstitutional, it takes local authorities by surprise . . . and threatens their capacity to contribute to social cohesion and urban development,” Mr Kaminis told a meeting of EU mayors in Vienna on Tuesday.

ECB Squeezes Greece on Collateral

Rounding out our trifecta of Greek news, ECB Squeezes Greece on Collateral.

As Greece scrambles to secure a financing deal with Europe before running out of cash, the European Central Bank is tightening the vise on the country’s ailing banks by curtailing access to desperately needed emergency loans.

The European Central Bank is now demanding that the value of the collateral that Greek banks post at their own central bank to secure these loans be reduced by as much as 50 percent, according to people who have been briefed on these discussions but who were not authorized to discuss them publicly.

With the value of the collateral being reduced so significantly, banks will be hard pressed to obtain the money they need to survive.

For more than three months, Greece’s largest banks have been forced to borrow short-term, higher-interest money from their central bank — a process called emergency liquidity assistance — because the E.C.B. deemed it too risky to extend credit to the banks itself.

The banks, in turn, have to provide adequate collateral to obtain these loans, which now stand at 74 billion euros, $79.7 billion, or more than half the amount of Greek domestic deposits.

Controversially, Greek banks have even begun to issue bonds to themselves and, after securing a government guarantee, have used the securities to secure short-term financing — a practice that was excoriated by Yanis Varoufakis before he became the Greek finance minister.

On April 8, for example, the National Bank of Greece self-issued €4.1 billion of six-month bonds that carried state backing. But with Greece on the verge of default — Mr. Varoufakis has frequently said his country is bankrupt — those guarantees are no longer worth much.

Under E.C.B. rules, the central bank of Greece assumes full responsibility for the credit risk when it issues these emergency loans.

But the E.C.B. carefully monitors them, setting limits and scrutinizing the collateral.

Capital Controls Likely Soon

What's that collateral that the ECB already has on deposit from the Bank of Greece really worth?

Regardless of the answer, we now have an official denial on capital controls.

If you have money deposited in Greek banks, get it out now. Capital controls seem all but certain, perhaps within days.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot

Caught on Video: Police Smash Woman's Phone as She Tapes Crime Scene; How to Stop "I am Above the Law" Mentality

In yet another cops are above the law incident Watch U.S. Marshal Crush Camera.

Nosy neighbors caught a video of a law enforcement officer in California snatching a bystander's phone and smashing it after U.S. Marshals realized she was recording their bust of a biker gang meeting. The 53-second video, taken from across the street, shows a gun-toting marshal grabbing the woman's phone out of her hand, throwing it to the ground, and finally kicking it. According to a spokesperson for the marshals, the video "is being reviewed."

How to Stop "I am Above the Law" Mentality

The only way to stop this kind of "above the law" mentality is to immediately suspend, without pay, any police officer guilty of such behavior. A second offense is grounds for dismissal. As an added incentive, fired officers should lose 100% of all accrued benefits.

And in this case, repayment for the phone should come directly out of the suspended officer's paycheck (at say a 500% of damages rate).

I am open to negotiation on the terms mentioned above. But the terms must be severe enough to cause an immediate attitude change.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot

Yield on Chicago School Bond Offering Hits 5.63%; Debate Over Risk; Miracles Not Coming; Bankruptcy the Sensible Option

Today a $295.7 million bond offering by the beleaguered Chicago Board of Education hit the market.

The Yield Hit 5.63%. That is 285 basis points higher than Municipal Market Data's benchmark triple-A scale.

Debate Over Risk

Municipal Market Analytics (MMA) says Despite it All, Chicago Schools' Default Risk is Low.

Peel away the layers of negative headlines and patient investors will find low default risks and underlying credit strength in this week’s $300 million Chicago Board of Education deal, according to Municipal Market Analytics.

“BOE debt is well insulated from default risk by significant 'belt and suspenders' protections,” MMA wrote in a market piece authored by Matt Posner & Kevin McGuigan Friday. “We understand that negative headlines, downgrades and Chapter 9 speculation have all damaged value but believe the case can be made for a considerable underlying credit strength that exists for patient investors.”

The bonds’ value has been hurt by a stinging series of negative headlines, from multi-notch bond rating downgrades to Gov. Bruce Rauner’s comments that no state bailout looms and bankruptcy is an option.

“Regardless of statements by the governor, Chapter 9 is likely a low probability outcome, allowing for a less cynical reading of CPS’ otherwise strong pledged security,” MMA wrote Monday in its weekly outlook authored by Matt Fabian, Lisa Washburn, and Bob Donahue.

“This security presents only minimal payment default risk,” Monday’s outlook piece said.

Debate Over Risk

I strongly disagree the MMA's assessment. While it's true that municipal bankruptcies are rare, the odds of this deal working out well are poor.

The only saving grace at the moment is that Illinois does not allow municipal bankruptcies.

And Rauner pledged "The taxpayers of Illinois are not going to bail out the city of Chicago, that ain't happenin. But there are things we can do to help them restructure and get their government and their schools turned around, and I'd like to help them.".

Simple Facts

• The Chicago Public School System has a $1.1 billion budget bole in a $5.9 billion budget
• The 2015 budget kited two months of property taxes from the fiscal 2016 budget
• A $228 to $263 million derivative time bomb just triggered on the Chicago Board of Education
• Chicago Public Schools may be out of cash in 30 days
• Corruption investigations plague the school board
• The school district faces a pension payment in 2016 of about $700 million.

No State Rescue

Where is the school district going to get $1.1 billion? Where is it going to get a $700 million pension payment?

The state? Think again.

Illinois Budget Deficit is $9 billion

Don't expect the state of Illinois to come to the rescue!

Crain's Chicago Business says Illinois' Budget Deficit is Twice as Bad as You Think.

Illinois' fiscal woes are significantly deeper and more serious than generally realized, with the state facing a $9 billion operating deficit in the fiscal year that begins July 1.

That's the horrific bottom line of a report released late today by researchers at the University of Illinois Institute of Government and Public Affairs, a study that may raise the eyebrows even of Gov. Bruce Rauner, who has been warning of huge financial problems ahead.

The conclusion: The actual deficit is about twice what is commonly reported, with the hole in the current fiscal 2015 budget not $2 billion to $3 billion but $6 billion, and rising to a projected $9 billion in fiscal 2016 and hitting $14 billion by fiscal 2026, assuming no changes in law or spending practices.

No Miracles Coming

How is a state that is $9 billion in the hole going to bail out a single school district that is $1.1 billion in the hole?

The obvious answer is that it won't and can't. There are no miracles to be had. The Chicago Public School system is bankrupt. All it will take to trigger bankruptcy is for the legislature to allow just that.

Bankruptcy the Only Sensible Option

Since downstate voters will not want to bail out Chicago, we may easily be approaching the point the Illinois legislature realizes it has no choice other than to allow municipalities the option of declaring bankruptcy.

This won't come easily for the legislature, but it's the right thing to do. Upstate vs. downstate politics may be enough to tip the tide.

Right Idea

Rauner has the right idea on taxes, on bankruptcy, and on a bailout of Chicago.

Not a penny of taxpayer money should go to fund a lost cause. I find it hard to believe that Emanuel himself does not know the school system is truly bankrupt.

When you are bankrupt, the only sensible thing to do is admit it.

That said, the law does mandate that parties in a chapter 9 bankruptcy dispute attempt to negotiate a settlement. Bankruptcy law must be adhered to. Realistically speaking however, history shows that unions will not concede benefits as they believe them to be sacrosanct, even though court decisions prove otherwise. Detroit made a huge mistake time-wise attempting to forestall the inevitable. Rauner needs to give an out of court settlement a chance, but for the sake of Chicago and Illinois, that chance should be of limited duration.

For more details on the miserable state of affairs of the Chicago Public School System, please see Credit Swap Event Triggers for Chicago Schools: Out of Cash in 30 Days, Cooking the Books to Oblivion.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot

Euribor Goes Negative, Banks Paid to Borrow from Each Other; ECB Risks Freezing Repo Market

Banks Paid to Borrow From Each Other

Via massive QE purchases of bonds, ECB president Mario Draghi is flooding Europe with cash that European banks don't want and cannot use.

One curious result of unwarranted QE is a negative interbank lending rate: Banks Paid to Borrow as Three-Month Euribor Drops Below Zero.

Banks in the euro area can now get paid to look after each others’ cash for three months as the European Central Bank’s bond-buying program floods the region’s money markets with excess liquidity.

The euro interbank offered rate, or Euribor, for that time period dropped to minus 0.001 percent on Tuesday, according to data from the European Money Markets Institute. That’s the first negative reading since Bloomberg started collecting the data at the end of 1998. The index represents the average rate at which the region’s banks say they see each other lending in euros for three months.

Money-market rates have declined after several moves by the ECB. In June it introduced a negative deposit rate, meaning that commercial lenders were required to pay a fee to park their excess cash overnight with the Frankfurt-based institution. The ECB lowered the rate to minus 0.2 percent in September. Then in March this year the central bank started buying government bonds under a 1.1 trillion euro ($1.2 trillion) quantitative-easing program aimed at boosting growth and staving off deflation.

“Excess liquidity keeps flowing into the system week by week because of the QE program,” said Nikolaos Panigirtzoglou, a strategist at JPMorgan Chase & Co. in London. “Banks find themselves inundated with deposits but they don’t want to pay the ECB for parking their money there. Instead they’d rather lend the cash in the interbank market.”

“It’s good news for borrowers, not so good news for lenders,” O’Hagan, Paris-based head of European rates strategy at the French bank. “Mr. Draghi wants us to spend the cash, not keeping it in Euribor. The purpose of QE is to get us to take on some risk.”

ECB Risks Freezing Repo Market

An ICMA official says ECB Risks Freezing Repo Market.

The European Central Bank (ECB) risks secured-lending or repo markets grinding to a halt unless it works more closely with national central banks (NCBs) to improve liquidity, a senior trade association official told Reuters.

Godfried de Vidts, the chair of the International Capital Market Association's European Repo Committee, said unless the ECB took action within the next few months, investors might start avoiding euro zone bonds.

"Investors could become reluctant to invest in euro zone debt," he said, noting that his committee had voiced its concerns to officials at the ECB. "We are scared about the market freezing," de Vidts said.

In recent weeks, one 10-year Bund became so scarce that market players paid up to 2.5 percent to lend cash in exchange for the German bond, dealers said.

De Vidts said the ECB's "securities lending" framework also relies too heavily on NCBs offering their own lending programs, and many of them have not yet put systems in place.

NCBs are responsible for 80 percent of purchases under QE, with the ECB directly buying the remaining 20 percent in the roughly 7-trillion-euro euro zone government bond market.

"We are driving without headlights in the dark," said de Vidts, proposing that the ECB centralizes the scheme in Frankfurt.

"You are getting this scenario - which is a nightmare for the repo market – of a re-nationalization of a market that had developed to become European."

Last week, ECB President Mario Draghi said the bank saw no evidence QE was creating a shortage of bonds, or that this might happen in the future.

Come Hell or Frozen Water, Program Will Continue

De Vidts believes excess liquidity might cause a freeze. On April 15, Mario Draghi made the claim "Stimulus is Working".

"European Central Bank President Mario Draghi said the bank’s stimulus efforts are beginning to take hold in the European economy and batted away concerns in financial markets that the bank may have to end its more than €1 trillion ($1.1 trillion) asset purchase program early."

If it's working, why wouldn't Draghi welcome ending the program early? Of course if it blows up in his face with unintended consequences, he may be forced to end it early.

Either way, Draghi has put himself into a box that says he will continue his plan come hell or frozen water.

The market may have something to say about that, perhaps sooner rather than later.

Stunning Arrogance

The arrogance of central bankers  in spite of the fact they recently brought the world to the edge of financial collapse is stunning. Now they have created equity and junk bond bubbles of massive proportion and don't even see it.

The program must continue. Why? Because we said so. All in the foolish belief they need to stop consumer prices from falling.

Even the BIS recognizes the foolishness of the idea that falling consumer prices are damaging. For discussion, please see Historical Perspective on CPI Deflations: How Damaging are They?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

America's Pension Problem: Gordon Long Interview of Mish

I had the pleasure of being interviewed once again by Gordon Long as part of his financial repression series. The topic of this interview was "America's Pension Problem".

Interview



Synopsis - By Gordon Long - Edited by Me

Mish Shedlock talks about the magnitude of the mounting Pension Problem in America and uses his home state of Illinois as a prime example. According to a State Budget Solutions, last year’s state unfunded pensions reached an all-time high of $4.7 trillion. This funding gap state public pension plans are underfunded by $4.7 trillion, up from $4.1 trillion in 2013. Overall, the combined plans' funded status has dipped three percentage points to 36%. Split among all Americans, the unfunded liability is over $15,000 per person.

Pending Pension Crisis

"Illinois Pension's in general are 39% funded. This is after this massive rally we have had since 2009 in financial assets. Some of the worst ones are only about 20% funded."

"Various cities in Illinois have problems, Chicago being one of them. The City of Chicago has a huge pension crisis right now. We have things in Illinois like "Home Rule Taxes" where cities can levy their own taxes in addition to the state. That is why we have varying sales tax that range anywhere from 6.25% to 10%, depending on locality."

"I have been working with the Illinois Policy Institute on pension and bankruptcy issues. There are a number of cities in Illinois that are ready to file bankruptcy. The problem is they can't file bankruptcy because the state doesn't allow it."

"The fundamental problem is they have made more promises than they can possibly keep"

Gaming the System

The problem is "you have police and fire workers who can retire after 20 years and collect up to 70% of their earnings based on the 5 highest years salaries. We see a lot of pension spiking in the last few years where for example police work overtime (which counts towards their best five years) so these workers stand to collect far more in retirement (total years in retirement) than they actually ever made while working (total years worked).

"Tax payers are actually funding the employees portion of the pensions by excessive wages and direct contributions ".

"Chicago floated General Obligation Bonds to fund current expenses. That is illegal. We have bonds here in Illinois that are tax exempt on the basis they are supposed to be funding long term infrastructure expenses that are funding short term needs."

Obscene Property Taxes

"Taxes in Illinois are already obscene. A homeowner on a $600,000 home can expect to pay $14-15,000 per year - every year on property taxes. Do you really own your own home in Illinois?"

"Pensions are so underfunded in Illinois that they are going to go bust in the next slowdown. I believe one (a slowdown) is on the way."

Looming Crisis Globally

Negative interest rates are sweeping the globe. How will states, cities and towns fund themselves and their pension obligations in an era of potential negative nominal bond rates?

Returns on the heavily weighted funds' bond holdings are being potentially destroyed while state bond offerings are likely to face mounting issues such as the monstrous overhang levels of unfunded pension liabilities.

"How will states, cities and towns fund long term asset assumptions of 7% given or exceptionally low or year negative yield bonds?"

Repression Series

Gordon's financial repression series is up to about 900,000 video downloads.

Guests include Marc Faber, John Rubino, Paul Craig Roberts, Doug Noland, Chris Martenson, Grant Williams, Doug Casey, Axel Merk, Dave Stockman, Steve Keen, and many others.

My previous interview was Gordon Long Video Interview of Mish: Topic - Financial Repression (and How to Defend Yourself From It).

At the end of the current interview, I briefly mention several trades I am currently in: Russia, Japan, gold and miners.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

Greece to Seize Local Government Cash; Two Year Bond Yield Tops 28%

Greece to Seize Local Government Cash

Robbing Peter to pay Paul took another leap forward in Greece today as Tsipras to Seize Public-Sector Funds to Keep Greece Afloat.

Running out of options to keep his country afloat, Greek Prime Minister Alexis Tsipras ordered local governments to move their funds to the central bank.

"Central government entities are obliged to deposit their cash reserves and transfer their term deposit funds to their accounts at the Bank of Greece,” according to the decree issued Monday on a government website. The “regulation is submitted due to extremely urgent and unforeseen needs."

Credit-default swaps suggested about an 81 percent chance of Greece being unable to repay its debt in five years, compared with about 67 percent at the start of March, according to CMA data.

The move is a sign of the “dire liquidity situation for the Greek financial system as the government pools all liquidity available,” said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London. The “next step may be forcing all public-sector entities, including public-sector companies to do the same,” he said.

Greek officials, including Deputy Prime Minister Yannis Dragasakis, remained defiant over the weekend, saying the government won’t betray its electoral promises and worsen the pain that came from previous austerity measures.

Unforeseen?

Somehow Tsipras labeled this event as "unforeseen" even though it was blatantly obvious the moment the Troika refused to relax terms on Greece back in January.

Stealing money from cities like Athens to pay state workers will ensure city workers don't get paid. Precisely what good will that do but prolong the shell game?

Two Year Bond Yield Tops 28%



The bond market is getting increasingly jittery over the current state of affairs as yield on two-year Greek bonds is now over 28%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot