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Hotel California Revisited: Prisoners Here of Our Own Device

Posted by Larry Doyle on May 20, 2009 4:30 PM |

“Tonight we have heard from the voters and I respect the will of the people who are frustrated with the dysfunction in our budget system,” Gov. Arnold Schwarzenegger said.

The Wall Street Journal provides full coverage, “California Voters Reject Budget Measures.”

What does California’s budget nightmare mean? The state will be forced to cut upwards of $20 billion from an $82 billion budget. How and why? In the face of the the massive recession, California’s tax revenues are insufficient to meet the state’s fiscal needs.

In years past, California and other states would tap the municipal bond market with bond insurance provided by a monoline insurer, such as MBIA or Ambac. Given the enormous losses suffered by these monolines, primarily on structured mortgage deals, they are no longer strong enough to provide insurance sufficient for California to raise funding. In a similar vein, California can no longer source a letter of credit provided by a large money center bank.

Where is California looking for a backstop to its financial woes? Well, much like the United Auto Workers, the strongly Democratic constituencies in California will look toward Washington for a backstop/bailout.

California’s representatives are downplaying the severity of the situation. California Treasurer Bill Lockyer, much like Barney Frank, condescendingly comments on the historically low level of defaults in municipal finance. Do I have to remind Bill and Barney that historical analysis was also highlighted in providing AAA ratings to sub-prime mortgage deals?

In fact, I was truly blown away by the relatively cavalier manner in which Lockyer assessed the California fiscal follies during a Bloomberg interview today. In my opinion, Lockyer seems to assert that California’s budgetary problems are due to outside influences beyond California’s control. It seriously reminded me of assertions made by executives at Freddie Mac and Fannie Mae.         

If Obama and team (Pelosi, Frank et al) provide federal guarantees for California, they will be opening Pandora’s box. At what point does the “fear of failure” kick in? Who will say, “NO?” When do people who want no part of “dysfunctional” states get a voice? If Uncle Sam backstops California, how about Puerto Rico, New York, New Jersey? Where does the madness end?

This 6 minute Bloomberg interview touches on a wide array of issues in the California mess. From my perspective, though, the tone of the California Treasurer is most telling. I sense no dramatic sense of urgency. Even “Ahnold” seems resigned to relying on Washington. In fact, where was Ahnold yesterday during the vote?

He spent election day at the White House for President Barack Obama’s announcement of a new vehicle fuel-efficiency standard. 

Yes, Welcome To The Hotel California.


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