This page contains a single entry from the blog posted on February 23, 2008 7:32 AM. The previous post in this blog was Enough nothing. The next post in this blog is A monumental journey. Many more can be found on the main index page or by looking through the archives.

E-mail, Feeds, 'n' Stuff

Saturday, February 23, 2008

Like I've been saying...

The O has finally caught on to the fact that our local governments have gotten themselves into trouble with loosey-goosey adjustable rate borrowing:

Since Feb. 6, the city of Portland has seen the interest rate on its $150 million in auction bond debt increase from 3.6 percent to 4.47 percent. Market unpredictability could force it even higher.

Unwilling to put up with that kind of volatility, the city has opted to convert the $150 million in auction rate bonds to fixed-rate securities. But stability comes at a price.

Eric Johansen, Portland's debt manager, predicted the city will have to pay 5 percent to 5.5 percent, meaning that the annual payment on that portion of the debt will jump from about $5.25 million to as much as $7.87 million.

Another $150 million of the city's debt will be repriced next week.

The stuff that has hit the fan is also blowing down from Pill Hill:

OHSU has $234 million in auction rate bonds. Three different times in the past seven days, its bond auctions failed.

In normal times, the interest rate on the OHSU debt hovered between 3.25 percent and 4.5 percent. But after the auction failures, the interest rate jumped to 12 percent on one $45 million issue and 10 percent on another $45 million issue.

But the current bond crisis is nothing if not unpredictable. The interest on a third $45 million issue actually decreased to 3.25 percent.

As a result, OHSU's interest cost jumped $60,000 a week, said Ken Brown, OHSU comptroller.

OHSU will know more about its financial exposure Thursday, when an additional $94 million of its debt reprices.

The whole, important story is here. As usual, the boys and girls at the O save the bad news for a Saturday, when readership is at its absolute lowest. Maybe next Saturday they'll get around to asking about how our governments' investments in the bond market are doing.

Comments (29)

Do we hear a sucking sound as if OHSU is circling the drain and COP is fast on its heels?

Keep in mind that OHSU's only problem is that it no longer has a liability (lie ability)cap. Cough Cough

Anyone else notice how trivial and 'splashy' the front page of the Oregonian has become? I LOVE the Blazers, but I don't think every win or loss needs 'BREAKING NEWS' treatment, screamed across the front page in giant bold letters.

Wacky science discovery? Check. Britney Spears meltdown? Check. Oscar nominations? Check. Surprising poll on male behavior? Check. It can all be found on the front page on any given day... only headlines, no story text. Tabloid layout, courtesy of your daily rag.

They're dumbing and numbing down the populace because they don't give anyone enough credit... imagine running a story about the financial tightrope our city is walking. Too boring!

I saw this article.

Saturday morning, you called it.

One thing I resent is that those of us who opposed the tram, etc...were cast as anti-OHSU, when nobody in Portland should want the hospital to get in trouble. We all appreciate the awesome stuff they do such as their recent 500th heart transplant. I believe Jack and the comment people of this blog were just trying to save OHSU from bad management decisions, and yes, part of it was the knowledge that the rest of Portland would end up paying for them. Jack was depicted as grouchy, but you tell me: Whose opinion of what was going to happen was more on the money? Meanwhile, the Oregonian should have been looking more closely, instead of acting as willing cheerleaders for the loudmouth bully element up on the Hill. And our city council should have spent less time sucking up to these people and more time taking care of Portland.

5.5% double tax-exempt bonds sound like a pretty interesting fixed-income investment. There's no chance of default, right? And if they default, they're backed by one of those big insurers, right?

"There's no chance of default, right?"

Look at what happened in San Diego and Vallejo.

"And if they default, they're backed by one of those big insurers"

Uh, if you pick up any large financial paper, you can read about the travails of MBIA and AMBAC having a slew of problems adequately covering these loans. That is why the ratee is being bid higher.

I am assuming you are jesting.

Saturday paper in the business section--had to make room on the front page for a Tanya Harding piece.

All of the cities investments are in real estate and Kosovo. That is as safe as you can get isn't it?

Gee if only there were another statewide newspaper that would report real news in an unbiased, fair and balanced manner. It could be called "The Fantasy Daily Dream"

Hey Jacko you are rich right? Why don't you buy the "daily dead fish wrapper" and purge all of the left wing nut bags. You could can all of the affirmative action drop outs and replace them with hobos. That would be a giant step up from what we have now.

Not so rich? well there is always Willamette week, The trib, The Mercury.

Ambac is expected to announce a capital increase next week, and will likely retain their AAA rating.

MBI has already recapitalized, and is also likely to add more capital if needed.

Any municipalities that questioned the value of those AAA ratings were given an excellent lesson (over the past few weeks) of how much the investor community values AAA rated bonds over general obligation/lesser rated paper.

It's also worth noting that the "stress-tests" applied to the financial guarantors assume a very low probability event (roughly equivalent to a further 25% decline in housing prices), and then tests for a 99.5% certainty of ability to repay.

If the worst case scenario (housing depression, worse than 1928-1935) the financial guarantors would likely split their muni-bond business from their structured finance business (the so called "good bank/bad bank" solution), and still retain their ability to pay all their obligations. Plus you have the better than AAA rated Berkshire Hathaway starting their own monoline insurance subsidiary: anybody who is willing to pay a premium can get the Warren Buffett guarantee on their bonds.

To put it into the simplest terms: muni-bond investors panicked, Wall Street fed the frenzy by reducing liquidity at the worst possible time. The MARS/ARPS crisis resulted from human psychology, unfounded liquidity fears, and not legitimate credit risk.

This too, shall pass. Economics trump fear (eventually), but not greed.


There is also the elephant in the living room of deferred maintenance.


As you showed in your blog, the water mains and other infrastructure is failing because it is way past its design life. If you go to page 81 of the CFAR


There are $2.703 Billion in depreciated assets or conservatively about 1/3 of the city's infrastructure assets. The majority is in the city's infrastructure that is no supported by fees. I believe that this depreciation is based on historical cost and not replacement cost. The average age of parks buildings for instance is well over 50 years. This is what caught up with the Portland Public Schools when they discovered their built assets needed over $1.4 billion.

To fixwill probably cost much more. The water system is at the end of its design life, and enough has been said about the regular roads.

The precious bonding capacity we have has been squandered on pet projects, and not the nuts and bolts maintenance the City needs to be sustainable, safe, and healthy.

Mister Tee: What you said makes more sense than anything I've come across from anyone else. However, I still don't understand. But I'm a quick study, in jargon words and complex concepts, if you're willing to try to explain. I'd appreciate it.

I don't know enough to know how to ask the question I have. Something like: What are the underlying fundamentals when it is not industrial output, (except war materiel); or, who or what is the repository of liquidity when all assets seem to be nothing and merely paper thin chasing paper thin; or, how could we tell whether or not the F.Reserve goes to printing currency as casual as kleenex; or, where's the gold and silver? ? ? ?

Or, perhaps from another approach: How does (or doesn't) your summary (abstract) square with this one, (although it is a month old): Mortgage bond insurers 'need $200bn boost', Tom Bawden and Suzy Jagger in New York, From The Times, January 25, 2008 ?

The MARS/ARPS crisis resulted from human psychology, unfounded liquidity fears, and not legitimate credit risk.

Yeah, but the cold fact is that AMBAC and MBIA have insured some bad mortgage paper. They're acting like they're going to be able to walk away from that paper while continuing to impart AAA ratings to muni bonds. The folks who bought the mortgage paper based on the AMBAC and MBIA backing aren't going to go away quietly.

Plus, there are billions of dollars of auction rate paper out there that is now going to try to switch to fixed-rate bonds. The law of supply and demand being what it is, fixed interest rates on muni's are about to go up substantially.

The end of this story has not yet been written.

Tenskey, do you really want a reply, or are you just jerkin' ma chain?

Jack: you are correct. Both MBIA and Ambac insured tens of billions of mortgage/credit related derivatives, some of which are likely fail. But it's unlikely they will ALL fail.

But they have tens of billions of claim paying capacity, in addition to their future stream of profits on the muni books. Plus, they don't have to pay out the full insured value in a lump sum. Their obligation is to pay off according to the original terms of the instrument (frequently 30 years, with principal due only at maturity). In the meanwhile, all that excess capital is earning interest at U.S. Treasury rates of return.

If they could never write another policy, then it's possible for them to become insolvent in the next 5-10 years. That's why maintaining the AAA rating is so critical to their going concern status.

If they quit writing new business today, and simply went into runoff mode, it would likely render the common stock worthless (assuming a repeat of the Great Depression). But that doesn't mean they would become insolvent in the next 5 years.

This has as much to do with FASB (specifically, mark-to-market accounting) as it has to do with the rating agencies.

The current liquidity crisis, for both the monolines and the investors, is going to pass.

And if you believe we're on the verge of the next Great Depression, then I am confident that Ambac and MBIA will be the least of Mr. Market's (or Portland's) problems. Hyperinflation or stagflation (while still minor probabilities) would destroy many regional banks, bankrupt many municipalities, and (potentially) push unemployment up to double digits. Imagine how Citibank or Wells Fargo would perform if 20% of loans were non-performing, and their loan activity was cut in half.

Those that remain employed would find that $20 bread and $10 quarts of milk result in rapidly decreasing standards of living. And Socialism would be an unlikely (though increasingly attractive) solution.

It's easy to underestimate the power of the U.S. economy, but there is a vested world interest in keeping that engine purring like a kitten. Even if they are losing money on our Treasuries for the next 30 years.

A more interesting question is why would Egan-Jones increase their loss estimates more than five fold in the past 4 months?

Maybe the housing/credit markets are 500% worse in February 2008 than November 2007, but I doubt it.


Nov. 6 (Bloomberg) -- Bond insurers including MBIA Inc., Ambac Financial Group Inc. and ACA Capital Holdings Inc. face ``massive losses'' over the next few quarters that could test their ability to raise new capital, Egan-Jones Ratings Co. said.

MBIA may lose $20.2 billion on guarantees and securities holdings, Sean Egan, managing director of Egan-Jones, said on a conference call today. ACA Capital may take losses of at least $10 billion; New York-based Ambac may reach $4.3 billion; mortgage insurers MGIC Investment Corp. and Radian Group Inc. may see losses of $7.25 billion and $7.2 billion, respectively, Egan said.

``There is little doubt that the credit and bond insurers face massive losses over the next few quarters and many will be capital challenged,'' Egan said.

"But it's unlikely they will ALL fail."
If that sentence was meant to be reassuring, it's not working.

Bill McDonald, I also resent that those of us that questioned the height, density and traffic issues, as being anti-Portland. Katz with her chief of staff Sam the Tram sitting in the chambers said that there were would only be 3 to 4 tall 250ft to 325ft buildings in all of SoWhat. It is in the record.

With 7 buildings existing or under construction, 6 more proposed for the two blocks north of the Spaghetti Factory, and 2 more on the drawing board, all just within the central district alone, I think it becomes fair to say that Planning, Katz, and Council were intentional "misleading".

Note that besides these projects there is over 3/4 of SoWhat to be developed. The citizens extensive drawings, computer generated photos presented to council showing 40 to 50 tall buildings seems very accurate. Katz said the depictions were "exaggerations" and asked her planning departments if her judgment was correct. Yes.

There was public testimony questioning the financial well-being of OHSU in regards to its dreams in SoWhat, and it becoming a developer and not a research, learning, and care providing institution. We know the response to these remarks.

I hope the amounts reported in the O are accurate, because they don't seem too staggering except for maybe OHSU which is losing money on a cashflow basis and no longer has Senator Hatfield to bail it out of a hole. I would hope the higher borrowing rate might slow Portland cityhall's capital spending binge but I'm most likely dreaming. Too really dream: Maybe the higher borrowing rates slow Sten's final efforts. Just have to slow things for a month, and he's hopefully gone.

Jack is on target, as usual. This story is not nearly over.

I am hearing that over 10 percent of US homes have loan/value underwater. If that is true, that is a huge number. I read today that some foreclosures are failing because the mortgage (asset that backed a derivative of a derivative of a derivative) has been resold and sliced and diced so many ways from Sunday that nobody can produce proof of ownership sufficient to foreclose. Others are evicted even with perfect payment records because the deal to fix the deal that was supposed to fix the deal that fixed the deal requires that the asset be liquidated, regardless!

As for being grumpy, one does have to admit that not all government over-reaching is a bad thing. The Louisiana and Alaska Purchases come to mind. OTOH, who was at the meeting when the decision was made to short my infrastructure and services, and the schools that make a community, in order to pay private developers to turn Portland into a high-rise farm? I can't remember getting an invitation to that one, and yes, I'm grumpy about it.

It will be an interesting experiment. All the reasons the technocrats give for favoring high-rises were persuasive when the Cabrini Green towers were planned. Same when so many of them were put up by the Soviets. Cabrini Green was eventually taken down and I think the Soviet ones have been left to squatters.

Our technocrats want to build the new Vancouver BC. Lots of the condos in those pretty Vancouver BC towers are owned by international business types whose primary residences are offshore, detached and single family. Will there really be enough of that kind of demand for the condo as second, third or fourth home in Portland? I have a hard time imagining it, but I guess we are going to find out.

I don't mind someone running the experiment, as long the game isn't being run at public expense. Pull the public dollars out of it, and put them into our infrastructure and services, where they belong.

It's a lot like the people who bought adjustable rate mortgages in the first place. Even if you plan on refinancing in a few years, when rates are at historic lows like 5.5% it is insane not to take that mortgage and take 2.5% ARM or something like that instead. That delta that you pay for a few years is a low price for 15 or 30 years of risk management.

But there are dumb consumers out there making dumb personal finance decisions all the time. These guys in local govt are working with investment banks and have professional staff. The same principle applies--pay a small premium and buy a big insurance policy by selling fixed rate public bonds. If you look at interest rates for the last 100 years, you realize that these opportunities for cheap financing don't come along very often. They had a historic opportunity to immunize the public treasury from interest rate risk and they blew it for some short term budget gains. Outrageous.

Tenskatawa... The answer to your last question: http://www.shadowstats.com/alternate_data


If you bought your house for $500,000 last year (with a $450,000 mortgage fixed at 7%), and just realized it's now worth $400,000, would you just walk away and let the bank foreclose?

Would you sell it simply because it's worth less than you owe?

If your answer is "no" to both questions, then we think alike.

If you answered "yes", where would you live?

I don't believe most people would consider letting go of their primary residence simply because the market value plunged.

If they were speculating, and couldn't afford to make their payments, then the equation is entirely different. But most people buy houses to live in them.

So the speculators get washed out of the market, some of those who owner occupied adjustable rate/payment mortgages get foreclosed on (many of them due to their purchaser's own ignorance or carelessness), and real estate prices don't go up for a few years (or even head lower for a few years).

But that's not going to crush the largest banks (so long as they can attract deposits and the access the capital markets), it's not going to affect property tax collections on the folks who keep their house, and it's unlikely to cause the next Great Depression.

Mister Tee:
Isn't your example just a fantasy? Who took 7% fixed when there were ARM's at less than half of that, some interest-only, some with negative amortization, allowing refinancings and pulling cash out of inflated values to buy cars, boats, home entertainment systems, etc.? These people live in owner-occupied homes. Not only do they no longer have a home equity piggy bank to smash for feeding their consumer appetites they now face monthly mortgage payments they can't afford. That's the real example, and that's why there's trouble ahead. You can moralize all you want about the stupidity/cupidity of these borrowers, but that won't make them, and the consequences, go away.


If the only way the borrower could afford the payments was if his Adjustable Rate Mortgage never adjusted, then shame on them. They deserve to lose the house if they didn't know what "adjustable" means or their credit/ratios are so lousy they qualify for a fixed rate loan.

ARMs and Neg-Ams never represented the majority of loan volumes for owner occupied mortgages, but they did rise to 45% for a few months in the most overheated localities. Caveat emptor.

Conforming 15 year fixed rate mortgages can still be had for 5.625% while 30 year fixed rate mortgages are 6.25% (7.5% on a Jumbo), according to Wells Fargo's rate sheet at https://www.wellsfargo.com/mortgage/rates/

I had a 7/23 balloon that was about 1% below 30 year fixed rates when I got it, after six years, I refinanced into fixed 30 year mortgage (at 5.5%), fully 0.5% higher tan my 7/23. My payments went up (rougly $150/month), but I wanted a fixed mortgage payment and expected rates to rise. Had I chosen the cheapest ARM at the time my payment would have decreased by $400/month.

Clearly, if a borrower didn't read or understand how their mortgage rates would adjust, they are train wreck waiting to happen. But I don't think you can blame the banks anymore than you can blame your financial advisor if you stock portfolio has lost money in 2008.

Most financial instruments (mortgage rates, stocks, bonds, currencies, commodities) fluctuate over time. If a borrower didn't understand how an ARM/negative amortization loan worked, he probably shouldn't have got one. Caveat emptor.

"Who took 7% fixed when there were ARM's at less than half of that"

It wasn't 7%, but I took a fixed over an ARM. Maybe before you make assumptions, you shoudl really investigate the mortgage industry - especially now that the Oregon legislature has fixed it by adding 3 more pages onto a 200+ page settlement statement.

Mister Tee, where is your dream world in which only the ignorant or careless borrower suffers the consequences of his or her choices? And what difference does it make where the moral high ground lies? Banks pushed these deals, got them, packaged them up and sold them off to willing investors (and what of their ignorance and carelessness?). Now they're in the tank. People will be dispossessed, impoverished, bankrupted on all sides of this. Just take a look at the graph of Washington Mutual's stock over the last eight months. Although the moral argument seems to me irrelevant to the financial predicament, if an ARM borrower was imprudent, what about an ARM lender, who has full responsibility for the documentation of the transaction and a full understanding of the interest rate formulas and their potential impact, as well as the opportunity (and the duty, if you ask me) to verify the borrower's financial capacity. What possible basis is there for preferring to protect the banks and their syndicated lenders, over the borrowers?

There is a silver lining to the muni bond debacle.

Uo and the OSSHE will have a lot of truble selling $ 200M in bonds to finance the latest monuments to the egos of Pat Kilkenny and Phil Knight.

Of course if the bonds do sell, the far higher than anticipated interest rates will just about guarantee that arena revenue will not cover principal and interest payments. Tthe joke "fund" set up by Knight to garner that juicy charitable contribution will be exhausred and the taxpayers will be left holding the bag. Again.

You fans of Macpherson will be surprised that E mails to Greg before he voted for the bond bill were never acknowledged. Its okay to disagree with ypour constituents, but its suicide to ignore them completely.

Devlin also never acknowledged pre - vote E mail on the issue.

Oregon Eyes: Thanx for the linx.

Mister Tee: Well, both, I think. I really want a reply -- and, so far, you're compiling a good one, (defined as instructive for me), piece by piece. Yet, a comprehending moment of the Ah-ha!, 'gestalt,' feels like it recedes as fast as I approach it. Without some sense of a 'unifying' sense of The Economy, by which / in which / for which The Economy operates or exists, then the way it is and the way it works seems to me no different from an arbitrary invocation of, "because I said so," which is about the same thing I distill from references to the influence of a 'psychology' or 'faith' in markets, trading, valuation, and such.

And, I'm a devil's advocate, (if that's yanking your chain), beyond skeptical to suspecting that this 'unifying psychology' it all seems to work by, and relate to, can NOT be dissected in its parts to each be merited for surety and soundness. So specialty analysis of instruments and holdings of muni's, mortgages, 30-year notes, issuance underwriters, and I don't even know what the jargon is, all amounts to conditional speculation that the other related pieces all also continue in 'regular' fashion during the term of the analysis. These 'other related pieces,' in my view of it, include (such things as) the population, [what if ... 50 to 100 million Americans expire this summer, as I can foresee the 'perfect storm' possibility of? I know, I know, or, that is, I suspect, you simply throw up your hands in despair that such a improbability cannot be factored into any equation, and of course all economic outlook, forecast, is off the table, patently useless or ridiculous, 'uncharted territory worse than 1931,' and so on ... but, it (regular population) never gets explicitly mentioned, it is an implicit 'conditionality,' on which all the surety and analysis and, yes, those SoWhat overreached up-stacks, are predicated], and besides population, more 'related pieces' in climate -to- crop regularity, natural resource (oil, ores, water) supply regularity, sh!t aliens or asteroids from off-planet (remaining nonregular events), and, just in general vagueness, that the Earth continues regular rotation.

To the extent that I 'believe' foreseeing possible anomalous discontinuities in some Economy-related piece, so catastrophic as 'all bets are off,' then, yeah, I'm not as interested in your expertise in The Economy's 'mechanics,' (which I am squinting at to find the fundamental difference from 'psychologies'), and I am more interested in what weighting of credence you give in the (some) 'externality' occurring, and if so, the collapse or devastation of currency's House of Cards, and if so, all your sure-grasp comprehension of the economic Model, and actually your worldview and grasp on reality, don't mean squat ... which, naturally, you or I or anyone else would subjectively deny any credence to.

I don't think of it, or mean it as, yanking your chain, but let's just say I am greatly skeptical that things actually are as sure, or sensible, as you detail the map of them. At the same time, I am following every point you locate on the map and connecting the territory and track between the points.

You're are doing very good by me, for the reply I sincerely asked for, so far ... AND, there's still this little smartass voice in the back of my head wanting to say, 'show me the money.'

Oh, btw, on topic, I think, Mister Tee, you and I may agree that a desirable nonevent would be if The O newspaper never printed another issue.

Clicky Web Analytics