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Muncipal bonds

Behind Montana Jail Fiasco: How Private Prison Developers Prey On Desperate Towns

Justin Elliott | October 12, 2009, 3:14PM

Two Rivers Authority parade float, 6/27/09

With the unraveling of the deal for the shadowy American Private Police Force to take over and populate an empty jail in Hardin, Montana, it's pretty clear that the small city got played by an ex-con and his (supposed) private security firm.

But an investigation by TPMmuckraker into how Hardin ended up with the 92,000 square foot facility in the first place suggests that, long before "low-level card shark" Michael Hilton ever came to town, Hardin officials had already been taken for a ride by a far more powerful set of players: a well-organized consortium of private companies headquartered around the country, which specializes in pitching speculative and risky prison projects to local governments desperate for jobs.

The projects have generated multi-million dollar profits for the companies involved, but often haven't created the anticipated payoff for the communities, and have left a string of failed or failing prisons in their wake.

"They look for an impoverished town that's desperate," says Frank Smith of the Private Corrections Institute, a Florida-based group that opposes prison privatization. "They come in looking very impressive, saying, 'We'll make money rain from the skies.' In fact, they don't care whether it works or not."

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Topics: American Police Force, CiviGenics, Corplan, GSA, Hale-Mills Construction, Hardin, Hardin Montana, Howard Geisler, James Parkey, Michael Harling, Muncipal bonds, Municipal Capital Markets, Municipal finance, Private Prison Business

Muncipal bonds

Another Faustian Swap: Indianapolis Water Authority Forced To Cough Up $100 Million-Plus

Moe Tkacik | April 13, 2009, 6:28PM

Another day, another group of American taxpayers forced to cough up tens of millions of dollars to Wall Street over a little-noticed provision in a "swap" contract gone sour. Last week we brought you the parallel tales of sudden budgetary meltdown in Tennessee, Alabama, Illinois, New Mexico and Philadelphia that in part prompted the credit rating agency Moody's to issue a blanket negative credit outlook on all bonds issued by American cities and towns. Today it's the Indianapolis Water Authority being screwed in a swap deal that might force the utility -- and by extension, its customers -- to cough up a collateral call of as much as $100 million.

The deal is a familiar one: in 2005 the city of Indianapolis refinanced $550 million in fixed-rate bonds to raise money to fund its acquisition of its old water company from the private utility company NiSource, which agreed to sell it as a condition of regulatory approval of its merger with Columbia Energy Group. The deal involved the ailing bond insurer MBIA as well as a similar German-Irish firm called Depfa Bank, which insure the utility's ability to pay up by writing credit default swaps on municipal bonds that protect investors in the event of default. But as Barney Frank pointed out last week, the risk of municipal bonds defaulting is historically minimal -- while the risk that MBIA and Depfa might default was steadily rising as they began to chase the riskier (AIG-dominated) business of writing swaps on collateralized debt obligations. And when those "insurers" started to see their credit downgraded last year, suddenly it was municipalities like Indianapolis that were swamped with calls demanding collateral -- which translates to a major refinancing being funded by an emergency 17.5% rate hike this summer.

If you're having trouble getting your head around how this works, it's a little like this: in order to get a cheaper interest rate on your mortgage, you pay you bank extra for a "swap" insuring the investors who buy the mortgage in the case of your default. But then the bank that originated the mortgage starts making riskier loans and its credit rating agencies downgrade its debt, it turns out the owner of your mortgage can demand collateral from you. Except in the case of municipal bonds, the homeowners are cities and towns with the legal authority to tax citizens and an infintessimal record of actually defaulting -- and the banks were using your interest payments to extend home loans to unemployed high school dropouts and senile 80-year-olds living on Social Security.

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Topics: Indianapolis Water Authority, MBIA Inc., Muncipal bonds, Municipal finance

Berkshire-Hathaway

Barney Frank Rousts Credit Rating Firm For...Being Too Negative?

Moe Tkacik | April 9, 2009, 5:14PM

Credit rating agencies are coming under fire from Congress again -- but this time it's for being too pessimistic. After Moody's issued an unprecedented across-the-board negative credit outlook on all American cities and towns yesterday, House Financial Services Committee Chairman Barney Frank issued his own negative assessment of Moody's, and scheduled a hearing to investigate:

I am troubled by the action of Moody's Investors Service to issue a negative outlook across the board on America's municipalities, which could raise the interest rates on cities and towns making it more expensive to borrow funds for infrastructure improvements.

On the face of it, this seems like a perverse round of messenger shooting. But last March, as cities and towns across the country started getting flooded with demands for huge payouts rooted in arcane details of "swap" contracts they'd inked with banks that managed their bond offerings, Frank discovered something truly perverse: the public sector was being scammed on multiple fronts by the investment banks underwriting their bond offerings -- and the profits directly fed the disastrous trade of risky mortgage-linked credit default swaps that hastened the financial meltdown.

The scheme started at the credit ratings agencies, which keep two sets of standards for grading corporate and municipal bonds -- and municipalities are held to a much higher standard, as Frank explained in a hearing using Moody's own data:

I will be giving out this chart, sectoral breakdown of Moody's rated issuers and defaulters, 1970 to 2000, general obligation bonds, there it is. Number of issuers 14,775. Number of defaults, 0.

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Topics: AIG, AMBAC, Barney Frank, Berkshire-Hathaway, Mel Watt, Moody's Investors Service, Muncipal bonds, Municipal finance

CDR

Regulator Who Regrets "Silence" About Derivatives Told To Shut Up

Moe Tkacik | March 26, 2009, 2:55PM

Yesterday Christopher "Kit" Taylor, the former executive director of the Municipal Securities Rulemaking Board, became one of the few regulators to publicly apologize for his role in the crisis. Like many public officials, he worried for years about the explosion in the unregulated derivatives market, which he was in the unique position of seeing bankers pawn off on slightly less sophisticated investors than the usual hedge fund guys: school districts, park authorities, power companies and other local government entities. Today Detroit, Jefferson County, Alabama and various towns in California alone are out more than a billion dollars after investing in interest rate "swaptions" and other financial "products" that left them on the hook in a national conspiracy through which banks, lawyers, consultants and corrupt politicos bilked as much as $4 billion a year from state and local government coffers. But "the big firms, he told Bloomberg yesterday, "didn't want us touching derivatives...they said, 'Don't talk about it, Kit.'"

"Every time I talked to the board about swaps, I made it clear that the MSRB had no authority to take action," said Taylor, in an e-mail. "My 'regret' is that MSRB would not speak out loudly that swaps were going to cost taxpayers a bundle if issuers did not clearly understand what they were doing."

Perhaps as penance, Taylor has been a main source for most of the media coverage of municipal finance corruption, currently the subject of a federal probe, and his candor has been hailed by his former colleagues in financial regulation, oh wait not really.