Comments on: Let the Lawsuits Begin — II http://alephblog.com/2008/02/16/let-the-lawsuits-begin-ii/ Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Thu, 18 Mar 2010 05:20:57 -0400 http://wordpress.org/?v=2.8.4 hourly 1 By: David Merkel http://alephblog.com/2008/02/16/let-the-lawsuits-begin-ii/comment-page-1/#comment-16893 David Merkel Sat, 16 Feb 2008 20:19:35 +0000 http://alephblog.com/2008/02/16/let-the-lawsuits-begin-ii/#comment-16893 There is only a modest problem here. Auction rate bonds are a small part of the market, and good credits like the NY Port Authority can easily refinance the debt. They won't pay 20% for more than a week or two, and it's not their whole funding base. Part of the difficulty here is that auction rate structures are unstable. They can handle 30 mph winds, but not 60 mph winds. Auction rate structures deliver low rates when things are calm, but can be toxic when short term liquidity dries up. A sophisticated borrower like the NY Port Authority should have known that going in. Small borrowers are another matter, their investment banks should have explained the risks. Yes, the explanations are all there in the documents, but a good advisor explains things in layman's terms. That said, it is usually the shortsightedness of local governments wanting low rates and long term funding at the same time that really causes this. You can have one or the other, but not both with certainty. There is only a modest problem here. Auction rate bonds are a small part of the market, and good credits like the NY Port Authority can easily refinance the debt. They won’t pay 20% for more than a week or two, and it’s not their whole funding base.

Part of the difficulty here is that auction rate structures are unstable. They can handle 30 mph winds, but not 60 mph winds. Auction rate structures deliver low rates when things are calm, but can be toxic when short term liquidity dries up. A sophisticated borrower like the NY Port Authority should have known that going in. Small borrowers are another matter, their investment banks should have explained the risks.

Yes, the explanations are all there in the documents, but a good advisor explains things in layman’s terms. That said, it is usually the shortsightedness of local governments wanting low rates and long term funding at the same time that really causes this. You can have one or the other, but not both with certainty.

]]> By: Brian http://alephblog.com/2008/02/16/let-the-lawsuits-begin-ii/comment-page-1/#comment-16891 Brian Sat, 16 Feb 2008 14:20:11 +0000 http://alephblog.com/2008/02/16/let-the-lawsuits-begin-ii/#comment-16891 There is a crisis as far as the state of NY is concerned, the Port Authority is paying 20% for short term paper. Moreover, politically, they can't stand by and let the entities that they regulate, the monolines, become the transmission mechanism for spreading the debt follies to the muni market. Spitzer is a thug. He proved that in his prosecution of Wall Street as AG. Facts be damned, he tried people in the media. Look at his record actually litigating, not very good. He is the classic bully, this is his M.O. There is a crisis as far as the state of NY is concerned, the Port Authority is paying 20% for short term paper. Moreover, politically, they can’t stand by and let the entities that they regulate, the monolines, become the transmission mechanism for spreading the debt follies to the muni market.

Spitzer is a thug. He proved that in his prosecution of Wall Street as AG. Facts be damned, he tried people in the media. Look at his record actually litigating, not very good. He is the classic bully, this is his M.O.

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