Market Talk

We opined in this space back in March of last year that if you wanted to know what lessons the unfolding crisis at the time in Greece held for the United States, the place to look wasn’t the federal level, it was the state level. Greek stories, after all, I said, always have something to teach us.

That’s becoming more apparent. Be sure to get a gander at the story at the top of page one in today’s Wall Street Journal, New Hit to Strapped States. The market for municipal bonds is getting tighter for all manner of issuers, hospitals, improvement authorities, schools.

With myriad agencies having to refinance tens of billions in bonds this year, it’s creating another headache for the states, which have enough of them to begin with. This isn’t just a bad rabbit hole to go down. It’s a nuclear rabbit hole.

It’s been a bad week for muni bonds, with the highest profile misfortune, the one that really got this whole mess into the public eye, this week coming from my own Garden State. Given that New Jersey sprouts more “improvement authorities” than bad reality shows, this is no surprise.

The New Jersey Economic Development Authority was forced this week to scale back a bond offering and offer higher yields due to weak demand. The authority cited the weather, but many cited Chris Christie, because just before the bond offering, the governor said rising healthcare costs might bankrupt the state.

Bad timing, that. But these problems aren’t going away, in fact they are likely to only grow.

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Gone, but not forgotten (nor the debt forgiven.)

On Sunday, I’ll be at the “New Meadowlands Stadium” in New Jersey for the Giants’ debut in their new home. I’ll be there early for the tailgate. I’ll be in the stands, yelling my head off and overpaying for beer. I’ll be there, ahem, late for the tailgate. It’s pretty much an all-day affair.

I’ll also be one of the thousands walking through the parking lot that covers the space where the old stadium once stood. The original stadium. Giants Stadium. That stadium is gone, torn down this spring. But its debt lives on.

If you want to understand why state and local finances across the country are such a wreck, why the capital of Pennsylvania, for instance, actually just flat-out defaulted on a debt payment, look no further than the series of  stupid, emotional deals local governments made for sports stadiums.

As the Times reports today, New Jersey still owes about $110 million on the stadium, even though it was just torn down. It goes without saying that a vanished building is no longer a revenue-generating asset, so taxpayers in the Garden State are going to end up paying the tab for a private enterprise’s (the Giants and Jets) whimsical idea to tear down the old one and build a new one that would generate even more revenue — for the teams that built it.

Harrisburg’s problem was an incinerator deal. In Jefferson County, Ala., it was a sewer system. In Seattle, Indianapolis, Philadelphia, residents are paying for stadiums that no longer exist.

How could so many different governing councils make so many bad decisions? The specific reasons may vary, but the ultimate conclusion must be clear: bad management. And don’t think it gets any better at the national level. It doesn’t. But these bad managers have managed to achieve one concrete goal: maintaining power.

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Ignominious day for the state of New Jersey, as it officially becomes the first in the union to be charged by the SEC for violations of federal securities laws. As any respectable defendant does in such cases, Jersey settled without admitting or denying. Ah, fugetaboutit.

Not to cast any aspersions, but it is interesting to note that the owner of Jersey’s tallest building, Goldman Sachs, also didn’t admit or deny and then settled SEC fraud charges not long ago. Coincidentally, former Goldman CEO Jon Corzine’s public service as a Jersey US senator and then NJ governor overlap the period (August 2001 to April 2007) when the SEC says NJ committed the violations. SEC says the problems were in the state treasurer’s office.

NJ sold more than $26 billion in muni bonds in 79 offerings, SEC said, in which it failed to disclose the underfunding of both a teachers’ and a public employees’ pension fund. Oops.

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What upsets me the most about the whole healthcare reform fight is this: in a year in which there were far bigger priorities, the Obama administration choose to make healthcare their signature issue. It’s actually infuriating. The biggest banking crisis in 80 years, the worst recession since the end of World War II. Eight million thrown out of work. Yes, healthcare is an issue, but it wasn’t the biggest issue.

So instead of really tackling those issues, he just had his Treasury Secretary conduct a white-wash of a stress test and threw money at the banks. He hastily concocted an $800 billion stimulus package, for whatever good that was. Congress pressured FASB to suspend mark-to-market accounting, the Fed open the liquidity floodgates, and everybody assumed the problems were solved, leaving Obama and the Democrats to chase their white whale, universal healthcare.

And that gave the Republicans their white whale, too, socialism. So everybody’s all geared up to fight this big, bothersome, distracting fight that’s an obsession for both sides, while the real issues, the broken regulatory system, the byzantine tax system, the massive debts at the personal, state and federal level, the deterioration of the middle class, get little more than jawboning.

Political capture. Remember that one.

Meanwhile, the problems aren’t being solved, and have moved up the food chain, from the individual level, to the corporate, and now to the state level. Regular readers of this blog won’t be surprised to learn that. But apparently, despite the spectacular meltdown in California last year, despite Detroit’s slide into oblivion, despite the massive budget shortfalls in New York and New Jersey, the scope of the problem hasn’t dawned on a lot of people. The NY Times’ Bob Herbert is one person, though, who gets it:

A story that is not getting nearly enough attention is the ruinous fiscal meltdown occurring in state after state, all across the country.

Taxes are being raised. Draconian cuts in services are being made. Public employees are being fired. The tissue-thin national economic recovery is being undermined. And in many cases, the most vulnerable populations — the sick, the elderly, the young and the poor — are getting badly hurt.

“We’ve talked in the past about revenue declines in a recession,” said Jon Shure of the Center on Budget and Policy Priorities, “but I think you have to call this one a revenue collapse. In proportional terms, there has never been a drop in state revenues like we’re seeing now since people started to keep track of state revenues. We’re in unchartered territory when it comes to the magnitude of the impact.”

America’s Greek crisis is already here. It may not get as bad here as in Greece, given that the states have the backing of the United States, while all the Greeks have are some squabbling neighbors and a seriously skeptical bond market. But this is a crisis all the same, with no easy solutions.

Welcome to New Jersey. Now pay up.

Our Newswires colleague Brad Davis sent this snippet along from a conference in Dallas:

Euro zone might struggle with its own sovereign debt crisis, but cash-strapped US municipalities are waiting in the wings with a debt crisis of their own, Thomas Glaessner, Citigroup global policy strategist, says at a forum hosted by Dallas Fed. “You can’t imagine how many clients come to us” looking for a way to bet against the debt of US states and municipalities, Glaessner says. It’s not just the euro zone, where Greece is implementing a belt-tightening program, that must “sacrifice” to meet austerity budgets, Glaessner says. Sacrifice also is going to be needed in US localities, he says.

We’ve been banging the drum on this topic for a while, that the states are getting ready to stage their own Greek drama. It’s very telling to me that Glaessner says “you can’t imagine” how many investors are coming to Citi that want to essentially short the states.

As Han Solo once said, I can imagine quite a bit (hey, I know this is a serious topic, but sometimes you just gotta let your geek flag fly, know what I mean?)

Look at my own beloved (and just as often reviled) Garden State: the new governor, Chris Christie, unveiled a harsh budget that’s already got some folks howling, and relies almost completely on spending cuts. As the Times explains:

To close a deficit that he asserted was approaching $11 billion, Governor Christie called for the layoffs of 1,300 state workers, closings of state psychiatric institutions, an $820 million cut in aid to public schools, and nearly a half-billion dollars less in aid to towns and cities. He also suspended until May 2011 a popular property-tax rebate program, breaking one of his own campaign promises.

Town councils, school boards, home owners and families are all going to feel this ax fall. And while Jersey in a tight spot, it’s far from the only state facing a crunch. Welcome to Sparta, kids. Don’t mind the implements of destruction.

- AOL paid some hefty sums to its former employees – $28.4 million to be exact – to its four top executives it replaced last year. “Want to make money? Become a former AOL executive,” MediaMemo blogger Peter Kafka says.

- Housing starts tumbled 5.9% in February. “This level of starts is both good news and bad news,” Calculated Risk says. “The good news is the excess housing inventory is being absorbed – a necessary step for housing (and the economy to recovery. The bad news is economic growth will probably be sluggish – and unemployment elevated – until residential investment picks up.”

- Bearish stance from Albert Edwards, Societe Generale strategist, isn’t losing steam. He questions recovery’s sustainability in large part because “credit is disappearing at this debilitating dehydrating rate.”

- Google’s (GOOG) Nexus One sales only 135,000 after 74 days at market, according to analytics firm Flurry. “A piddling amount,” Digital Daily blogger John Paczkowski says, especially since Apple’s (AAPL) iPhone and Motorola’s (MOT) Droid sold 1M and 1.05M, respectively, after their first 74 days on the market.

- A downgraded US credit rating wouldn’t be pretty. Good thing Tim Geithner says there’s no way that will happen.

- “Don’t kid yourself: the hype currently surrounding short sales and the HAFA program will prove to be short-lived, and REO expertise will be prove to be the key to recovery, as it has been in prior cycles,” Paul Jackson writes at Housing Wire.

- What does corporate America think about financial reform? “It’s actually really hard to say,” Justin Fox says.

- Columbia Journalism Review argues blogs have been doing a better job covering the examiner’s report on Lehman’s collapse when compared to mainstream media’s coverage.

- The worry about the Fed ending its MBS purchase program is it will cause long-term interest rates to rise, which will hinder recovery. But if that happens, the Fed’s capable of restarting the program “very quickly if needed,” Mark Thoma writes.

- NJ Gov Chris Christie proposes steep spending cuts that will hit “the poor, elderly, schoolchildren, college students and inner-city residents hardest, while largely sparing the wealthy and businesses,” NYT says.

The Acropolis of New Jersey.

As the Greeks tear themselves apart trying to come to grips with their precarious situation, here in the United States, people are looking at the Argives’ problems and wondering what if any lessons we can draw from their woes.

The general perception seems to be that while the United States and Greece have some things in common, like big deficits, the differences between the countries are so great that there is scant to learn from the Greek crisis. But Greek stories always have something to teach us.

With the Greek prime minister in town last week, the Associated Press set about trying to draw the appropriate lesson for the United States. “Greece is a financial basket case, begging for international help,” Tom Raum  asked. “Is America heading down that same road?”

It’s a valid question. But to get the right answer you need the right comparison. The United States of America is not in the same shape as Greece (although, at the rate it’s going…) But the states that make up the United States? On the state level, Greece’s problems are already here. Much like Greece, much like the federal government, the state governments have racked up huge debts, have resorted to any number of budgetary gimmicks, and now that the economy has turned down, the feta’s really hitting the fan.

What the Greeks are having forced upon them — austerity — states like California and New Jersey are adopting on their own, with oftentimes painful, but necessary, results.

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Greece has finally put the Castor oil on the table. The question remains can the Neo-Spartans drink it and digest it. And who else is going to have to drink it before this whole drama reaches its denouement? Because what the Greeks are having force-fed to them is the same stuff taxpayers in the United States are going to have to swallow at some point, voluntarily or not.

The Greeks unveiled a harsh austerity plan that includes a variety of tax hikes and pay cuts, designed to save them about $6.5 billion. “The decisions were necessary to be taken. Necessary for the survival of our country, of our economy. For Greece to emerge from the vortex, from the speculators, from the negative publicity,” Prime Minister George Papandreo said.

The measures have already been met with fierce resistance. “Black crows ready to devour country’s wealth and leave half the population jobless,” one newspaper headline said. As we said yesterday, it’s worth considering whether or not Greece can even make this plan work. But they’re pushing it because they have to in order to get the kind of “support” they need from their eurozone partners, and the Germans aren’t going to pony up any money unless they see the Greek’s flagellating themselves for their past profligacy.

Make no mistake, that belt-tightening is the cost of  “support,” from the eurozone and whomever else buys all that Greek debt they have to issue this year to fund their budget (and do so without paying such a high yield that the interest rates alone overwhelms their revenues.) And that’s a cost that might be ringing up cash registers across the globe before this whole great deleveraging wave passes.

Jim Bunning may have been tilting at windmills with his little quest to make Congress actually pay for its spending bills, but Don Kentucky is onto something, make no mistake (perhaps you’d prefer to compare him to King Lear; either way.) Now, the Greeks are trying to cut about four percentage points off their debt-to-GDP ratio. If the United States were to embark upon a similar plan, we’d be looking at cutting something like $500 billion in spending (very roughly.) Those spending cuts would come very dearly. Or perhaps I should say, will come very dearly. Because at some point, we will hit the wall, and that point is coming faster than some reckon.

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MTV at the Jersey Shore, circa 1915.

Somewhere in the state of New Jersey, there’s already some little man, in a little green lampshade-colored plastic visor, who’s calculating just how much my property taxes are going to rise. I can feel him.

There hasn’t actually been much reaction among my fellow New Jerseyans, at least the one’s I know, to the “state of emergency” invoked by our new governor, Chris Christie. Just about everything, it seems, costs just a little bit more in New Jersey, for some odd reason that nobody can ever seem to figure out (ahem.) There’s a fiscal bomb going off? What else is new?

(Editor’s note: everything costs more in New Jersey, except gas, Russolillo points out.)

So this latest disaster scenario has invoked the usual response: There go our property taxes. It’s all just part of the delicate dance we entertain every day here in the Garden State.

But west of the Delaware (and east of the Hudson for that matter,) New Jersey suddenly is known for more than just mobster shows and trashy kids down the shore. Hey, we’re like California! Or New York. Or Illinois. Or Michigan. Or Ohio. Actually, when you think about it, there are a lot of states that are up against the wall, aren’t there? We’re just one in a long line. The state of the state, to state it just so, is pretty bad, and getting worse. California’s crisis last year grabbed all the headlines, but the Golden State is far from alone in sitting on top of a ticking debt bomb.

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It looks great, until you're drowning in it.

We’ve been saying for some time now that the budget problems in the states is at some point going to be a big problem, like a tornado-just-blew-my-house-away big. With the wife and kids in it. And the dog.

The 50 states currently face collectively a roughly $140 billion budget shortfall, and while California’s problems have been the most prominent, the Golden State is far from alone.

“The same pressures that drove (California) toward fiscal disaster are wreaking havoc in a number of states, with potentially damaging consequences for the entire country,” the Pew Center said in a fresh report. The report looks at the 10 states in the worst shape: California, Nevada, Arizona, Oregon, Michigan, Wisconsin, Illinois, Florida, Rhode Island and <snif!> my beloved (and often concurrently reviled) New Jersey.

It’s a gathering storm, to be sure, being held back at present only by federal stimulus largesse, as the Journal reported yesterday:

Once stimulus funds have been accounted for, states still face a combined deficit of $142 billion for fiscal 2011, up from $113 billion for the current fiscal year, according to the Center on Budget and Policy Priorities.

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