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Any effect on CA muni bond funds?
Old 10-03-2008, 07:55 PM   #21
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Any effect on CA muni bond funds?

I have a whack of VCADX. Sitting tight so far, but wondering...should I be worried?
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Old 10-03-2008, 07:57 PM   #22
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Apparantly "business as usual" in CA means borrowing money to pay for routine expenses. I think matching taxes and spending so you don't have to borrow is a better idea - but that's so old-fashioned.

If I were a lender, with fewer dollars to lend than I had a couple months ago, I might focus on better risks than CA.

Maybe the "credit crunch" will be an eye opener in CA (I'm not holding my breath on that). I certainly hope the federal gov't doesn't think it has to bail them out.
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Old 10-03-2008, 08:07 PM   #23
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The current issue is about "revenue anticipation bonds" which are short term instruments. My understanding is that they have always been used to cover the bursty nature of the states receivables (collecting tax receipts only once a year). Problem is, the credit market is seized up, and no one will buy them....

I'm wondering if there are ways this could leak over to longer term CA bond market as well, and what the implications might be for those of us invested in funds like VCADX.
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Old 10-03-2008, 08:28 PM   #24
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Wow!!

After all the discussion on this board I'm surprised everyone is missing the point . . . so here it is:

CA is asking for a loan from the government because it's afraid it can't roll-over it's short term financing. This isn't about taxes or spending. It is about short-term liquidity.

Remember all the discussion about commercial paper (CP) and how companies may not be able to meet payroll, etc. etc. because of the credit crunch? Remember how some folks were opining that we should just let everyone default? Well the crisis is spreading and now entire states are at risk, with CA looking to be the first victim.

You may have noticed how tax exempt mutual funds are paying really, really, high yields? (I know there was a thread here on the topic). Do you think they are just being generous? Sorry, but no. They are struggling to raise short-term liquidity like everyone else. If the states can't refinance their short-term maturities they will default . . . welcome to the credit crisis.

But don't worry, the market will sort it all out.
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Old 10-03-2008, 08:34 PM   #25
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Apparantly "business as usual" in CA means borrowing money to pay for routine expenses.
You do realize that corporations and governments don't sit on piles of cash to manage their liquidity, don't you?
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Old 10-03-2008, 08:41 PM   #26
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Yeah, it was interesting when everyone thought those 5%+ MM yields were a free lunch.
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Old 10-03-2008, 08:54 PM   #27
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So let me understand this (I don't quite understand how state finances work):

California borrows money on a short term basis, to pay state employees salaries and other state expenditures. They keep rolling over the debt until, supposedly, tax revenues come in, at which time California uses the money to repay its short term loans. Then they have to borrow money again to tie them over until the next revenue cycle... It sounds backwards to me. The finances charges on those short term loans must be a big waste of taxpayer money! It's kinda like living on credit cards for 3 to 6 months, and then you have a big lump sum coming in, you repay your CC debt and you start digging the hole all over again until another lump sum comes in...

So, if I understand this, now that these loans are coming due, California must borrow more money to repay these loans () but they can't find anyone willing to lend them money at a reasonable rate? Is that correct? It sounds crazy.
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Old 10-03-2008, 08:58 PM   #28
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This isn't about taxes or spending. It is about short-term liquidity.

It's exactly about taxes and spending. When some bub hits me up for 40 bucks because he doesn't have enough money to make it to payday, it's not a "liquidity crisis"--it's an earnings/spending issue. Maybe he's gotten accustomed to squeaking by in this way--that doesn't make it responsible behavior.

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Remember all the discussion about commercial paper (CP) and how companies may not be able to meet payroll, etc. etc. because of the credit crunch? Remember how some folks were opining that we should just let everyone default? Well the crisis is spreading and now entire states are at risk, with CA looking to be the first victim.

Yep. Are there lessons CA should now learn about how to manage resources?
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You may have noticed how tax exempt mutual funds are paying really, really, high yields? Do you think they are just being generous? Sorry, but no. They are struggling to raise short-term liquidity like everyone else.
But don't worry, the market will sort it all out.

You've identified the precise mechanism by which the market is working it out. Higher interest rates will bring more money to be loaned. CA will pay more money for this short-term loan--which brings us back to taxes, spending, and the need for fiscal responsibility on a personal, state, and national level.

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Old 10-03-2008, 09:13 PM   #29
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The finances charges on those short term loans must be a big waste of taxpayer money! It's kinda like living on credit cards for 3 to 6 months, and then you have a big lump sum coming in, you repay your CC debt and you start digging the hole all over again until another lump sum comes in...
Money isn't free. If the state sits on piles of cash to manage its day to day expenses someone is paying for that cash. That person is you.

So what is your cost of funds? 18% on a credit card? 9%+ on a home equity loan? Meanwhile the state typically borrows at 2%. So do you think it is more efficient for the state to borrow from the capital markets at 2% or from its tax payers at 9%+?
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Old 10-03-2008, 09:22 PM   #30
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So do you think it is more efficient for the state to borrow from the capital markets at 2% or from its tax payers at 9%+?
Well, there's "efficient" and then there's "effective" and then there's "prudent." In the present situation, it looks like California's "live on credit" policy is none of these, wouldn't we have to say? Maybe in the past it was "efficient", but, based on what we now see, it was never prudent.
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Old 10-03-2008, 09:23 PM   #31
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You've identified the precise mechanism by which the market is working it out. Higher interest rates will bring more money to be loaned. CA will pay more money for this short-term loan--which brings us back to taxes, spending, and the need for fiscal responsibility on a personal, state, and national level.


But CA is saying that it needs an emergency loan because it doesn't think it can raise the money it needs, at any price. It is not asking the Federal government to intervene because it wants a lower rate. The money is simply not available. Meanwhile CA is a viable long-term credit. It is completely irrational that the market would not give CA money for 30 or 90 days, but fear is overwhelming people. Now that CA has said it needs help you can almost hear the sound of money being drained out of tax free money market funds around the country.

You need to accept the fact that the market is breaking down . . . and market solutions alone will not fix it.
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Old 10-03-2008, 09:25 PM   #32
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They should just raise my taxes and get it over with.
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Old 10-03-2008, 09:25 PM   #33
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Well, there's "efficient" and then there's "effective" and then there's "prudent." In the present situation, it looks like California's "live on credit" policy is none of these, wouldn't we have to say? Maybe in the past it was "efficient", but, based on what we now see, it was never prudent.

This may well be true.

But let me ask you . . . how many weeks of food do you have in your house? If the trucks stopped replenishing your local grocer, would your pantry look "prudent"?
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Old 10-03-2008, 09:34 PM   #34
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Money isn't free. If the state sits on piles of cash to manage its day to day expenses someone is paying for that cash. That person is you.

So what is your cost of funds? 18% on a credit card? 9%+ on a home equity loan? Meanwhile the state typically borrows at 2%. So do you think it is more efficient for the state to borrow from the capital markets at 2% or from its tax payers at 9%+?
I may very well be naive about all this. But I guess I don't understand when it became acceptable practice for states and companies to borrow money to cover operating expenses, that's all. Borrowing money through bonds to finance large projects, I understand, but borrowing money for routine outlays, I don't understand.

Even if you can get access to cheap money, isn't it still more expensive than sitting on piles of money (that could earn interests until they are needed and therefore reduce the amount of taxes to be collected) and pay your bills from that pile of money? I guess I don't understand how it costs more money to sit on piles of money than to live on credit.
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Old 10-03-2008, 09:35 PM   #35
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. . . it doesn't think it can raise the money it needs, at any price.
Do you honestly believe this? That there is no rate at which California could borrow funds?

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It is completely irrational that the market would not give CA money for 30 or 90 days, but fear is overwhelming people.
California bet that interest rates would stay low, and that's the assumption upon which their state budget is built. They bet wrong, and foolishly. Just like a homeowner betting that his ARM wouldn't go up. It's not that California can't get the money--it's that they can't get the money at the interest rate they want to pay. Too bad. I'll bet a lot of states have similar struggles, and would love to go to Uncle Sam for a temporary loans ("just this once!!" )

If California's wants favorable bond ratings (and interest rates), the state will need to live within its means. Lots of far poorer states do just fine. I have no tear for the Golden State.
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Old 10-03-2008, 09:40 PM   #36
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I guess I don't understand how it costs more money to sit on piles of money than to live on credit.
You're right that it doesn't cost the government anything to sit on a surplus. In the same way it doesn't cost a company anything to sit on a hoard of cash. It does, however, cost the taxpayer (or shareholder). Typically, the return on cash balances to the government (or corporation) is lower than the cost of funds for the taxpayer (or shareholder).
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Old 10-03-2008, 09:51 PM   #37
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Do you honestly believe this? That there is no rate at which California could borrow funds?
Yes I do. Because I've seen the commercial paper market close to credit worthy borrowers. If an entity (state, municipality, corporation, etc) needs to borrow $10 today, and only $5 of interest shows up, no yield is going to bring that extra $5 into the market TODAY. In the short run, supply is very inelastic. And you have to get through the short-run if you want to avoid bankruptcy.

And also in today's environment high yields actually scare people off. Do you think investors are running to get those 5% tax free money market yields? Or do you think they are saying to themselves, "why are those yields so high? There must be something wrong. I'm going to stick my money in treasuries at 0% where at least I know it's safe."

In that case do you really think a 10% yield will help?
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Old 10-03-2008, 10:04 PM   #38
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Im still wondering where that huge surplus that California had went... The mysteries of the universe. Good news though they finished working on I 5! Hot damn! By the way I cant stand Arnold either.. Bring back Petey boy.
I'm a long way from being expert on CA budget issues, but wasn't that surplus built on the housing bubble just like our (U.S.) late '90s surplus was largely built on the tech stock market bubble?

When the bubble pops, the money goes poof!

I've heard some stats about the CA economy being something like 25% based on the housing industry (builders, realtors, mortgage financing, etc.). I don't know if that number is accurate but it was certainly high from what I understand. Something about too many eggs in one basket comes to mind. Am I right about that?
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Old 10-03-2008, 10:16 PM   #39
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I may very well be naive about all this. But I guess I don't understand when it became acceptable practice for states and companies to borrow money to cover operating expenses, that's all. Borrowing money through bonds to finance large projects, I understand, but borrowing money for routine outlays, I don't understand.

Even if you can get access to cheap money, isn't it still more expensive than sitting on piles of money (that could earn interests until they are needed and therefore reduce the amount of taxes to be collected) and pay your bills from that pile of money? I guess I don't understand how it costs more money to sit on piles of money than to live on credit.
Yeah that's one thing that I've been learning in this whole credit crisis situation that's got me scratching my head too. I'm no business major but I really have a hard time understanding why so much of business' ongoing day-to-day operations is funded with short term credit vs. a larger cash position. It seems as if this may just be one more evolution that's occurred in this era of easy money/credit that is now showing it's downside. Operating on debt is riskier than a cash operation.

I wonder how Buffett operates??

samclem has some very good points in this thread that speaks to this as well.
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Old 10-03-2008, 11:26 PM   #40
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I'm not entirely sure that the market is being irrational in being slow to lend California money. The state manages it's finances like a train wreck. They have been having trouble making ends meet in fairly good times with one of the highest tax rates in the country.

There is likely to be a fairly severe recession. California is ground zero for the housing crisis, so I would imagine that any recession we have will be even more severe there. They will likely have a massive budget shortfall, with very little room to raise taxes any further. The people of California have shown absolutely no willingness to cut spending in the past, so I don't think the possibility of California going completely off the rails is too small to ignore.

I personally wouldn't loan them money.


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But CA is saying that it needs an emergency loan because it doesn't think it can raise the money it needs, at any price. It is not asking the Federal government to intervene because it wants a lower rate. The money is simply not available. Meanwhile CA is a viable long-term credit. It is completely irrational that the market would not give CA money for 30 or 90 days, but fear is overwhelming people. Now that CA has said it needs help you can almost hear the sound of money being drained out of tax free money market funds around the country.

You need to accept the fact that the market is breaking down . . . and market solutions alone will not fix it.
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