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The New Improved 2009 Floaters

So much is made of the special abilities of Wall Street to innovate new ways to flow capital to various entities…

But is all innovation good? Or is some of it just new ways for Wall Street underwriters to package securities and make fees?

The Wall Street Journal reports today on the New Improved 2009 Floaters…

~~~~ “Wall Street firms including Citigroup Inc., Goldman Sachs Group, Inc. and Morgan Stanley, Co. have introduced a new security for the damaged municipal-bond market, meant to fill the role once played by securities that lost investor confidence in the peak of the market panic.

Their effort is part of Wall Street’s search for new ways to create business after a crippling nine months of crisis and government intervention. Much like auction-rate, variable-rate, and corporate floating-rate debt, the new tax-free “Windows” or “X-tender” securities offer municipalities the ability to borrow for the long term while paying only short-term interest rates.

This model proved dangerous during the credit crisis. Banks and bond insurers — who offered both express and tacit guarantees to backstop the debt — failed to live up to some of their promises. These securities became untradeable and dropped in value, leaving money-market funds in jeopardy of “breaking the buck.” Borrowers like municipalities, nonprofit institutions and student-lending companies faced penalizing interest rates well over 10% for months.

Like auction-rate securities and other variable-rate debt, the new instruments have an interest rate that resets every week, but this one is based on a short-term municipal debt index. The securities act like short-term debt and are appealing to money market funds that need to be able to sell their investments quickly.”~~~~

It seems that there is as much opacity in these products as auction rate securities (ARS)… although I’m sure the dealers have developed disclosures for the products that will not ensnare them like ARS… what about the following ? …

  • What is the “short-term municipal debt index” cited?
  • And where do investors and issuers get access to it?
  • Will “similar securities” pricing rules apply to “Windows” for valuation?
  • Do credit ratings incorporate a “liquidity” premium for these securities?

Hopefully money market funds will be doing increased levels of due diligence on these issuers… and the SEC will be monitoring the reset process and the index process in an active way…

Clickbroker.com makes some other points ~~~~ “The interest rate would be reset every week based on a short-term municipal debt index, rather than an actual auction. So there is no risk of a failed auction. With the risk removed from the underwriters the fun can really begin. I’m sure there will be all types of protection available for sale to both the borrowers and lenders. Interest rate swaps that the municipalities cannot hope to comprehend would just be the beginning.“~~~~

I hope this is not a repeat of Jefferson County… I hope that municipal officials will take the time to really study the various products that are being offered to them by the Wall Street underwriters… I hope that we hear no more stories of the “slick” muni banker wining and dining the gullible official who then buys millions of dollars of swaps for their community…

You can just feel it all starting again… message to Wall Street… some profit is just sleazy… and putting it over ill-informed muni officials falls into that class…

Bring on the muni issuer protection…