At their recent shareholders meeting, JP Morgan Chase CEO Jamie Dimon had good news and bad news. First, the good news. He downplayed the risk of Greece going belly-up, at least as to its impact on Chase, and he doesn't think the EU is coming to an end.
"Greece itself would not be an issue for this company, nor would any other country," said Mr Dimon. "We don't really foresee the European Union coming apart."
However, a major risk he sees on the potential horizon is the default of the State of California. $20 billion in the red, the nation's most populace state is drowning in debt and the Governator is running out of ideas. The state was forced to issue I.O.U.'s last year as a temporary measure, but things have only grown worse. Apparently, Dimon believes that if California defaults it could cause a domino effect among smaller states.
Increasing taxes to cover the shortfall is a bitter pill for the state to swallow, as it is already one of the highest-taxed states and it's most talented and productive citizens have been fleeing in droves over the past decade - only to be replaced with low-skill, low-wage manual laborers who access state services in greater proportions.
But every attempt to trim expenses is met with a large outcry from the people who have grown accustomed, and now feel entitled, to the very services that would have to be cut. This is the reason I wouldn't be touching any kind of debt instrument (corporate, municipal, mortgage-backed, or even government - except possibly T-bills) with a 100-mile pole right now.
Is beach-front property about to get a lot cheaper in the Golden State?
Gosh, what happened to California? When I lived there in the late 80s and early 90s it was really THE place to live. But, now it seems bad on all aspects...
I grew up there, and lived there off and on until I was in my early 30's. It has been interesting to watch to progression. My dad was Wozniak's mailman back in the day. I'm sure it's still a great place to live if you have fuck you money, but it has to suck for the peasants.
Cali won't default... at least, not under this administration. They keep kicking the can down the road, instead of making true structural changes... I could see something happening post-2012, after they've privatized ("aka P3'd") every single parking lot/parking meter/public transpo system in the state.
The problems in CA require a constitutional convention to fix, not these one-time measures they keep taking (a la borrowing from their local governments). California needs to repeal a few of these crazy propositions that require a 2/3 supermajority to get anything done, and cap property tax increases to 1% a year (while expenditures grow 5% a year, unchecked.)
Bottom line: California is democracy on crack. And it needs to go to rehab.
While I don't see Obama guaranteeing CA GO debt unless it's absolutely on the brink of defaulting, I certainly don't see him letting the world's 8th largest economy go under, for the very reason Dimon states: contagion.
(I'm a buy-side R/A in public finance, so it's not an entirely uninformed opinion.)
California is broken, and it's on an unsustainable trajectory. It's just a matter of time before fiscal disaster hits. The reason more people haven't piled into such a trade already is because the press would have a field day if it got word hedge funds/investment banks were betting on California default after getting a taxpayer funded bailout.
The only solution is to cut spending or raise taxes. Neither will happen without bankruptcy, especially with California's inept government. A bailout will solve nothing and will create an even bigger monster in the future. If nothing is done, the contagion will spread from state to state like it did previously from one financial institution to another. Either way the picture is not pretty.
You bring up an interesting point (obliquely, anyway), and one that's been batted around a lot lately.
How far would legalizing dope go to solve the state's money problems? I guess a lot depends on how heavily it would be taxed, and it would probably require a whole new bureaucracy to maintain standards of safety and quality (i.e. making sure the consumer is getting da chronic and not oregano).
Might be time to try some truly libertarian principles, no?
EB - Cali is staring down a $210bn budget deficit - set to double by 2011. Legalizing dope could shore up ~30bn of the problem, from what I've heard. So - it'd be a drop in the bucket. And that's assuming the entire market didn't go underground.
http://moneyandblogging.files.wordpress.com/2009/01/dropdead1.jpg
Should be fun.
p.s. Drugs are already taxed. See: http://www.economist.com/world/united-states/displaystory.cfm?story_id=…
You'd have to be out of your mind to be buying land in California. Residents aren't going to take responsibility for the state's debt, but something has to. My bet is real property will have to suffer for there to be any sort of return to bondholders- obviously, it's not the bondholders' fault that California defaulted.
Please explain your logic... why do you think a tank in property values would provide any incremental return to bondholders... if anything it would pressure debt service on GO issues to an even great extent.
Also.... Cali hasn't defaulted. And it won't.
Can anyone else who works in fixed inc. explain what in the world this guy is talking about (no offense illiniprogrammer) - because i dont see how less demand for CA real estate is going to help out GO bondholders. It does not make ANY sense.
dude either my concept of the capital markets is entirely upside down, or you have no idea what the hell you are talking about.
It's going to help out GO bondholders because tax rates went up so net revenues to the state are higher despite the CONSEQUENCE of lower property values.
You have to understand that states just can't declare bankruptcy and have the debt forgiven. There's no provision for it. The real question is what represents the borrower or the equity in the state of California. My view is that it's the one thing that can't leave the state- land and buildings. I actually suspect there may be a one-time 20% real property tax in California to pay down the debt, but ultimately, we can talk about tax hikes, too.
Well, at least when it comes to CA, everyone's concept of the capital markets is a little upside down and nobody knows what the hell they're talking about because no state has really ever gotten close to insolvency before (aside from Arkansas which received a federal bail-out during the Great Depression) and there's no provision for state bankruptcy. We're about to see what happens- my view is that the debt ultimately gets paid by the things that can't leave the state- namely real property.We all know what happens when a corporation goes bankrupt due to insolvency; the equity holders get wiped out and the bondholders get the assets. The question is, how far do CA's assets extend? I honestly think it ultimately covers everything that can't leave the state- including the land and buildings.
The problems are simple:
Too much entitlement spending
Too few taxes because of prop 13
And yet with CA's f----d up policies and imminent bankruptcy, we are still letting Pelosi & Co. spread their policies to the rest of the U.S.
Has the world gone mad?
Just adding gas to the fire... http://www.wallstreetoasis.com/forums/the-next-catastrophe
I love California, but there is an epic storm brewing...
Too many people still chasing dotcom riches, too many others living off of the government, too many people trying to keep up with the Jones', and too many people striving to be middle class.
illini - Even if property values continue to tank, legislators are limited in california by proposition 13, which is essentially a property tax abatement (Cali can not legally raise property taxes in any given year by more than 1%). If you think they're going to get a 2/3 majority to override '13, I think you are mistaken. Also, one-time 20% tax would be unconstitutional. So, barring a constitutional convention (wont happen) Cali is really in a bad spot. Falling revenues, very limited rate-raising ability... an no legislator (certainly no supermajority) is going to vote for a 20% one-time tax....
So, I disagree... a continued tank in real estate values will not result in a huge tax hike to offset the losses.
As I've said in previous posts, I do not think California will file. And you are correct - states are not authorized to file. But it doesn't take chapter 9 to screw bondholders... all it takes is a default (two very distinct and separate concepts.)
As far as liquidtation of assts go, ya gotta read up a bit on Chapter 9 bro! There is explicitly NO liquidation of assets (real property or anything else) involved... bondholders get left holding the stick. Little thing called the 10th amendment that keeps bankruptcy court's role very limited in chapter 9 filings... the federal government can't impinge on a state's ability to operate by forcing liquidiations of ANYTHING. No state buildings, highways, etc. are going to get sold. Trust me on that one.
So we will have to agree to (dis)agree - we both think Cali will continue servicing its GO debt. I just think they will privatize every parking meter, highway, mass transit system, and college (on their own accord, not in Ch. 9). Forced liquidation is not an option.
Los Angeles is an entirely different story - $212mm gap in 2010 going to double to ~$400mm in 2011. Watch them P3 their parking lots and meters this year in a one-time effort to seal it up. Calling that one now.
Also, regardless of the fed's power to handle BKs, having the state spend money while it is in default with creditors and not in bankruptcy may constitute fraud on the part of a number of politicians. In other words, there's ways for bondholders to make things really painful for California if they don't pay have and have a friendly federal prosecutor.
I think you're putting the cart before the horse. The tax hike will hurt real estate values. If Proposition 13 is repealed and your property taxes go from $5K to $20K, your property looks a lot less attractive- sort of like with a coop.An interesting discussion - you make good points. This all opens up the idea of which would be viewed as having seniority - debt service to bondholders or the public service for the public good. I'm putting my bets on the public good... sold short the CA GO at ~120bps over the AAA scale, bot CA ERBs around the same. If the GO blows out past 250, I'm back in
California is in a precarious situation, but CA is a state, not a bank, and I would be shocked if it wasn't bailed it if it were to default. Does it make sense for the Obama administration to bail out AIG and then refuse to bail out a state government?
Carolina- only thing about a bailout is the very, very slippery slope it would put Obama on. I mean there are 49 others, right?!
That said, I do agree--- and don't see Obama letting the worlds 8th largest economy default for an extended period. I don't thing you can have a national recovery without CA (or someone) paying it's debt!!
Molestiae id incidunt qui placeat numquam. Et consectetur soluta doloribus voluptates. Earum quo rem suscipit magnam asperiores.
Accusantium dolores asperiores soluta esse facere. Aliquid aut voluptatibus et sed. Atque fugit voluptas ducimus aspernatur sit. Animi aut perferendis debitis et. Facere qui quia voluptatum voluptatibus sunt. Recusandae et qui cupiditate doloribus occaecati occaecati facilis ut. Veritatis autem ipsa qui nisi aperiam.
Architecto ad in eius at. Sunt molestias consequatur a illo. Consequatur aut ex ut voluptatibus nesciunt et aut.
Qui molestiae minus inventore magnam. Sit sit modi et nemo culpa molestias earum. Quisquam aut delectus rerum nulla libero consequatur. Necessitatibus perspiciatis aperiam molestiae eum consequatur facilis.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Et doloremque autem illum cumque iure quasi voluptas. Officia odio magni aut saepe commodi. Nobis odit atque corrupti odit ullam.
Velit fuga ducimus est nam sint perspiciatis. Officiis mollitia aliquid porro quis ex ipsam nemo. Et est facilis perferendis rerum ipsa perferendis. In tempore nihil inventore sed consequuntur minima. Similique eaque excepturi eos corporis dolorum eius in reprehenderit. Odit quia quis qui tempore autem quia enim.