Tuesday, December 28, 2010

Who's been naughty?

Posted By on Tue, Dec 28, 2010 at 2:02 PM


The New York Times sure has one sick sense of Christmas cheer.

The elves who write the paper's editorials tried to ruin our holiday weekend by warning of a "looming crisis in the states," a big and mean economic cratering.

Since every large state in the nation apparently has been run for decades like a coked-up Lehman Brothers, they are now broke and neck-deep in debt and even Wall Street finds it unseemly (or has doubts) that there are profits to be made by buying up the states' massive debts . . . which means without federal intervention these states are only months away from a cascading economic collapse.

Ho ho ho!

If you didn't catch it, and if for some reason you aren't depressed enough about your life already:

Starved for revenue and accustomed to decades of overspending, many states have been overwhelmed. They are facing shortfalls of $140 billion next year. Even before the downturn, states jeopardized their futures by accumulating trillions in debt that they swept into some far-off future.

But that future is not so distant, and the crushing debt has made recovery far more difficult to achieve. As The Times reported, Illinois, California and several other states are at increasing risk of being the first states to default since the 1930s. The city of Prichard, Ala., has stopped sending out its pension checks, breaking state law and shocking its employees.

The editorial begins by pointing to the well-reported "gamble" being made by a desperate Illinois that it can postpone the collapse of its critical services by convincing investors and hedge-funds managers to make whole the state's debts to its service providers. It is in debt to these vendors more than $4.5 billion. The state would then have to pay back those short-term loans, with interest.

The Illinois approach works like this: Investors take over the delinquent bills owed by the state to its vendors. Those vendors are due a 1% penalty each month after the state falls behind by 60 days. The financial investors make the vendors whole and are entitled to 1% monthly penalties until the state pays the investors back.

With Illinois currently five months behind on its bills, investors who participate in the program today could collect 3%, which state officials say works out to an about 12% annualized return. The rate is double that of many long-term Illinois state bonds, which pay roughly 6% annually.

And then, yesterday, in the not-so-distant future the editorial was referring to, the paper reported on a city in Michigan begging to be allowed to declare bankruptcy: “The state is concerned that if they say yes to one, if that door is opened, they’ll have 30 more cities right behind us."

Happy new year!

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