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Wednesday, November 12, 2008


The City of Portland's new bonds -- borrowing around $15 million to pay for fire station upgrades -- will bear the highest rating, Aaa, according to Moody's. So reports the city's debt manager, Eric Johansen. The bonds are scheduled to be sold next week.

Unlike most of the nearly $3 billion in bonds that the city has outstanding, these will be "general obligation" bonds, which means that the city is promising to raise whatever taxes may be necessary to pay them off. That gives Moody's comfort.

Of course, if Moody's bond ratings really were reliable, the nation's financial markets wouldn't be in the tank. A lot of paper that was rated "Aaa" a year ago has gone bad, wickely bad. As one large institutional investment manager recently put it, bond ratings are basically "comparing b.s. to more b.s." Nonetheless, a top rating is better than a lower rating, everything else being equal.

Speaking of which, a whole slew of outstanding Portland bonds were downgraded last week, because the bond insurance companies from whom the city bought default insurance have themselves taken serious turns for the worse. Now a bunch of Portland debt that was once rated Aaa has been pushed a few notches or more down from the top of the ratings -- mostly in the Aa range, but one A3 and another Baa1. The insurance companies' ratings (Baa1) are now mostly lower than those the city would have gotten without the insurance, and so the hefty premiums that were paid for those insurance policies have now become a waste of money (at least from the bondholders' standpoint).

The downgraded bond issues include:

Sewer System Revenue Bonds (underlying rating Aa3)
Water System Revenue Bonds (Aa2)
Limited Tax Revenue Bonds (General) (Aa1)
Limited Tax Revenue Bonds (Visitor Develop. Initiative) (Aa1)
Limited Tax Pension Obligation Revenue Bonds (Aa1)
Limited Tax Improvement Bond (Aa1)
Airport Way Urban Renewal and Redevelopment Bonds (Aa3)
Oregon Convention Center Urban Renewal and Redevelopment Bonds (Aa3)
South Park Blocks Urban Renewal and Redevelopment Bonds (Aa3)
Downtown Waterfront Urban Renewal and Redevelopment Bonds (Aa3)
River District Urban Renewal and Redevelopment Bonds (A3)
Limited Tax Housing Revenue Bonds (Aa1)
Hydroelectric Power Revenue Refunding Bonds (Baa1)

The official bad news from the city can be found here.

Borrowing money is becoming really, really expensive for Portland. Maybe we don't need new streetcars and a new minor league stadium right now.

Comments (13)

There was a piece on NPR about this issue late last week. Overall, its troubling that Portland (or any borrower) will have to pay higher rates because of the failures of the third-party who sole purpose is to provide backup.

Its especially troubling because, according to the NPR piece, municipalities don't default on bonds. Maybe I'm crazy but it seems out of whack that a borrower-class who has no defaults and gets insurance suddenly has to pay more because of the failures of the insurer.

I'd be pissed if my credit rating tanked because of my insurer and through no fault of my own.

if my credit rating tanked

I believe that in this case the city got nothing but a benefit from the bond insurers (MBIA and Ambac) -- just not as much of a benefit as it had hoped.

By buying insurance, the city got Aaa ratings (and lower interest rates) for bonds that would otherwise have been rated much lower. Now that MBIA and Ambac have cratered, if I understand it correctly, those bonds get rated at the higher of the MBIA/Ambac rating or what they would have gotten with no insurance.

In the end, I think, the ratings are no worse than they would have been without insurance. But if they're no better, the bond insurance premiums were a waste of money.

I'd think the ratings are worse than if there had been no insurance.

With faux-insurance, the bond is committed to premium payments towards insurance that provides no benefit. Greater payment on bond means more risk to lender. A bond without insurance has a lower payment because 100% goes to paying the lender. (Of course, this assumes that ability to repay is a consideration in the rating).

To be honest, I barely understand the financial issues underlying and structuring municipal lending. To be honest, the recent economic issues have convinced me that few folks know what is going on exactly.

You are right, Chris. Insured bonds are bad deals when the insurance doesn't actually boost the ratings. Boosting the ratings (and lowering the interest that must be paid to the bondholders) is the whole point of the insurance, for which a hefty premium is charged up front.

I've tried to revise this post to make things a bit clearer.

Of COURSE we need new streetcars and a new stadium. The people have spoken and they voted in Sam-the-Tram and if you think a change in bond ratings or interest rate will slow the man down, then you haven't looked at his history or heard his plans for the city. The folks wanted this man (and his plans), now they get to pay for it.

"Maybe we don't need new streetcars and a new minor league stadium right now."

You know who Sam learned from and she knows you sneak this garbage in immediately, because it just can't wait.

"Portland (or any borrower) will have to pay higher rates because of the failures of the third-party"

This implies someone is paying lower rates, which isn't true. Real-world types are seeing that a year down the road, tax revenues are going to get real tight and that servicing these bonds comes after stuff like servicing PERS/PFDR stuff. So while they wouldn't default, they might have to do something to reschedule payments.

Its just right now, there are better lookign investments, even considering the tax breaks of municipals and the ability of insurance to cover. Plus these things are NOT general obligation bonds, which makes them less attractive since they can only be paid with revenue from the project I think.

We need streetcars and minor league stadiums and convention center hotels because the people who finance Sam and the commissioners need to build them to keep their businesses highly profitable. So we're going to get 'em. And we're going to pay for 'em. What the taxpayers want or don't want just doesn't matter.

As Frederic Bastiat said, "Government is the great fiction by which everyone tries to live at the expense of everyone else."

"The folks wanted this man (and his plans), now they get to pay for it."

As a renter of a charming close-in SE home who has not see a rent increase for 9 years I think its absolutely hilarious that PDX loanowners will be footing this steep bill.

The city's debt manager, Eric Johansen, writes:

Your statement that the payment of bond insurance premiums by the City "were a waste of money" is simply wrong. The interest rates and debt service costs paid on fixed-rate, insured bonds do not change due to a subsequent downgrade in the rating of the bond insurer. Once the bonds are issued, the debt service is fixed. Therefore, the City’s taxpayers and ratepayers continue to receive full benefit from the premiums that the City paid for, what was at that time of issuance, Aaa-rated bond insurance.

It is true that holders of the City’s bonds are likely to experience a
decline in the secondary market value of their bonds when the bond insurer’s ratings are downgraded. However, declines in the value of the bonds in the secondary market have no effect on the debt service costs borne by City taxpayers and ratepayers. In short, the risk of a post-issuance rating downgrade on fixed rate bonds is borne entirely by the investor, not the taxpayer.

He's misquoting us there. We didn't say the premiums were a waste of money. We said they became a waste of money, a statement that we stand by.

The clear understanding at the time the city paid the large premiums on all these bond issues was that the insurance would guarantee a top rating throughout the life of the bonds. And that understanding was, as he puts it, simply wrong. "Only the bondholders got screwed, not the taxpayers." Great.

UPDATE, 5:17 p.m.: Just to be fair, I've added language to the post noting that the "waste of money" would be as viewed from the bondholders' standpoint.

By the way, noone has mentioned that there is a very limited market for Muni Bonds right now. Individual investors have largely vanished from the Muni market. And the usual institutional investors are getting a lot pickier these days.

My wife is a bookkeeper, so far at least 5 of her clients are shutting down their businesses. These are (for the most part) not small businesses, nor are they particularly hurting by the economy. However, with the economy looking like it is combined with Obama's proclaimed tax policies, they are shutting down to protect the money that they have. These are people who provided bridge loans (for construction), angels (to help startup companies) and people with money to invest. They will NOT be buying muni bonds (some of them once did), they ARE moving out of Oregon as well as their money. It's not looking real good out there folks.

Here's another angle on This Whole Business, i.e., the global economy, dropped and broken from the fumble-fingered hands of incompetent apprentice know-nothings ... 'still wet behind the ears,' as dusty ranch hands say. (Referring to the last place a newborn slimy-wet calf dries out.)

The End, by Michael Lewis, Nov 11 2008

To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.

I’d never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous — which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.

When I sat down to write my account of the experience in 1989 — Liar’s Poker, it was called — it was in the spirit of a young man who thought he was getting out while the getting was good. I was merely scribbling down a message on my way out and stuffing it into a bottle for those who would pass through these parts in the far distant future.

Unless some insider got all of this down on paper, I figured, no future human would believe that it happened.

I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. I expected readers of the future to be outraged ...

In the two decades since then, I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. ...

Tensky-best post you've ever made. Thanks.

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