No need to ask why

Via Bloomberg (emphasis mine):

Almost a year after the Federal Reserve began to cut its target rate for overnight loans between banks to 2 percent from 5.25 percent, borrowing costs for states, cities, hospitals and municipal authorities are going in the opposite direction.

The $2.66 trillion municipal debt market is reeling from a series of jolts springing from a decline in the creditworthiness of insurers that once backed half of all securities sold at the same time the economy teeters on the edge of a recession, eroding tax revenue.

When it’s being noted that borrowing costs are going up because of the insurers’ creditworthiness, you can be fairly certain that the fortitude of the actual borrowers is already in the tank.

Need examples?

• The Illinois governor proposes putting speed cameras on interstates to pay for Chicago police reinforcements;
• Detroit’s mayor is put in jail after trying to sell a tunnel to the Canadians;

and

• New York’s governor is begging in…Washington.

Only Arnold Schwarzenegger seems to have a clue - cut pay and lay off workers, and veto every spending bill that crosses the desk, until a realistic budget is finalized. Of course, he’ll have to get past the whining state workers’ union and ancient payroll system technology (in the heart of the information technology center of the universe no less) for his hard-nosed tactics to work.

Nevertheless, there’ll be no borrowing without usury for state and local governments. Considering that the institutions having been riding the gravy train, on the backs of bond ratings propped up by bogus “insurance”, that’s probably the way it should have been all along.

Barry Ritholtz:

The chart above shows a steady deterioration in the balance sheets of the states and cities of the US since the late ’90’s.

Check out the chart…it sure does. One has to wonder why anyone was surprised when municipal bond auctions started failing.

Financial stocks rally because Warren Buffett is attempting a bailout of bond insurers. The nonsensical reasoning is reinsuring the municipal risk carried by the gang including MBIA and AMBAC is supposed to shore up their credit ratings, and they’ll be ok as a result.

Not so fast. A sensible person should pay attention to these points:

• Buffett is not touching the caustic CDO stuff that put the insurers in their precarious positions in the first place.
• It’s the nasty stuff now trading at pennies on the dollar with the highest risk of default, which means capital calls are still inevitable.
• Capital is in short supply at these insurers, and derivative counter-parties are hiding under rocks right now.
• At least one insurer has already said no.

Municipal deals were long the bread and butter of these bond insurers. At one time, they were producing record revenues and profits per employee. Then the insurers got greedy, backing structured finance transactions they had narry a clue about, and now they’re poised to tank. A shrewd person like Warren Buffett knows this, which is why he is going specifically after the municipal business. I’d suspect Buffett doesn’t care if these insurers fail - Berkshire would be in a perfect position to take over the direct lines which it is already reinsuring - the highly profitable end of the business. Peel off the last decent layer before the core finally rots away.

This move doesn’t relieve credit markets - it looks more like the fifth nail in the coffin.

And if that’s not enough, Jesse Eisinger says municipal bond insurance is just a scam anyway. (h/t to Paul Kedrosky)

UPDATE: The WSJ had the same idea, although they alude to Mr. Buffett as “the Wolf.” I don’t think there is any sheep’s clothing here - it’s just too obvious, and Mr. Buffett is simply looking to reward his shareholders. There is nothing inherently wrong with that.

Slightly less amusing than owning banking stocks

From the Screw FASB And Their Damn Year End Closings Department:

From the Every Dog Has Their Day Department:

From the Sallie Mae’s Collateral Is Worthless Department:

From the I’ll Take That Muni At LIBOR + 16 Department:

and…

From the Microsoft Ain’t Dead Yet Department: