PrefBlog

Today’s post may be foreshortened, due to the time I spent on crony capitalism. Well, anyway, here goes…

Naked Capitalism leads off with a piece suggesting that there’s not much worth saving in the monolines taking great exception to the idea that the proposed recapitalization of Ambac will be via a rights offering. I don’t see anything wrong with a rights offering myself … it allows existing shareholders to avoid dilution and, perhaps, get in on the opportunity to increase their position at a discounted price. And if they don’t want to increase their position, they can sell their rights to take their money off the table. Such procedures are much more fair to extant shareholders than private placements; I don’t understand why there aren’t more of them.

Naked Capitalism suggests that even the Good Insurer part of potential splits might be not all that good, citing a third party’s mention of the City of Vallejo, CA’s current problems:

Vallejo is a municipality. Presumably its debt would be considered AAA. Yet its civic leaders are talking about filing for bankruptcy. You wonder why local government and public works-related auction bonds are failing left, right and centre? US state and municipal finances are in dire shape – just as you would expect when the housing market is in deep depression and the economy is in recession.

And if you think Vallejo is a one off, consider California itself (isn’t it something like the tenth largest economy in the world in its own right?). Remember, US states are constitutionally bound to run a balanced budget. California is now faced with a US$16bn deficit (see here). Some legislators are calling for unilateral tax INCREASES (where’s your $170bn stimulus package now Mr Bush?) as well as spending CUTS. The US is in deep, deep trouble and it isn’t coming out of it for years.

So I looked a little into press reports about Vallejo:

Vallejo may run out of cash as early as March, council member Stephanie Gomes said.

“Not only that, but now we have 20 police and fire employees retiring because they are afraid of not getting their payouts,” Gomes said. “That means we have another few million dollars in payouts that we had not expected. So the situation is quite dire.”
…
The city currently has a $135 million liability for the present value of retiree benefits already earned by active and retired employees and an additional $6 million a year as employees continue to vest and earn this future benefit, [City Manager] Tanner said.

“The problem is basically bloated union contracts,” [Council Member] Shively said.

… and, with a bit more detail:

[Council Member] Gomes said salaries and benefits for public safety workers account for 80 percent of Vallejo’s general operating budget. “The city cannot support this anymore,” she said.

Gomes said that last year, 98 firefighters made more than $100,000 and 10 made more than $200,000 including overtime. It is overtime that some firefighters say they would just as soon not have to work.

This is happening in a city with a population of about 120,000. Quick! Somebody call David Miller! We’ve finally found a city that’s run worse than Toronto!

Vallejo was recently downgraded by Moody’s (enormous spreadsheet) to A3 (Watch Negative) from Aaa (Watch Negative), as a result of the downgrade of FGIC.

The monolines did catch a break today! S&P affirmed MBIA as AAA though it remained on Watch Negative. Ambac is still under review.

Naked Capitalism also reprints a report on the collateral accepted by the TAF. The Fed claims it lends only to sound banks, irrespective of collateral; NC says he doubts it. I’ll go with the Fed.

In what BCE shareholders will hope is not a foreshadowing of things to come, Wachovia has sued Providence Equity Partners (part of the BCE acquisition group) to get out of a financing:

Wachovia, the fourth-largest U.S. bank, said Providence officials changed the terms of the accord without consent from the Charlotte, North Carolina-based bank and voided the agreement, according to a lawsuit filed in state court in North Carolina Feb. 22. Providence and two of its investment banks, Goldman Sachs Group Inc. and UBS AG, agreed over the weekend to drop the price from $1.2 billion for the Clear Channel unit, a person briefed on the negotiations said.

Well! They drop the price and Wachovia jumps at the opportunity to call foul! This is an interesting development.

Rather a dull day for prefs, although the fact that this is only the third trading day this month that PerpetualDiscounts were down gave it some interest. Not much price action and the volume was rather lame as well.

Still no sign of new issues, much to my chagrin!

There were twelve other index-included $25-pv-equivalent issues trading over 10,000 shares today.

This entry was posted on Monday, February 25th, 2008 at 9:09 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.