Thursday, July 5, 2012

Strong Words Between Assured Guaranty and the City of Stockton

There has been a heated exchange between bond insurer, Assured Guaranty, and the City of Stockton over its bankruptcy filing.  Assured Guaranty insured the City's two riskiest and most ill advised bond sales in 2007, $125 million in pension obligation bonds and $40 million to buy the WAMU building for a new city hall.

I don't have a lot of sympathy for the bond insurer.  Although they weren't the underwriter (that was the risk-loving, now bankrupt, Lehman Brothers), they are certainly part of the Wall Street financial crowd that encouraged cities to issue pension obligation bonds with deceptive sales tactics that downplayed the risk.  Pension obligation bonds were routinely sold as if they were refinancing debts (exchanging liabilities) when they were really high-risk investing on margin.

The Wall Street bankers came to the City of Stockton in 2006 and literally told them that selling pension obligation bonds were a low-risk strategy that was a better choice than their budget balancing alternatives such as painful cuts to employee salaries, retiree benefits or layoffs.  When the risky bet blew up in Stockton's face (the value of the Bond proceeds were invested right before the market crash of 2007, leaving Stockton with both its fixed bond liability and a huge investment loss), the Wall Street bond traders and insurers are now demanding that Stockton make further cuts to its employee costs and services rather than reducing what they are owed by a cent.  The City has cut over 30% of its employees, slashed the pay of remaining employees by 10-30%, is taking promised health care benefits from its retirees, and is enduring a crime wave after slashing its police force.

Assured Guaranty says in this statement that they are being treated unfairly, as if all the City didn't also have contracts with its employees and retirees (at the time it insured risky bonds) and an on-going obligation to provide essential services to its citizens.  No bond insurers were at the City Council meeting to explain why honoring the obligation to pay them was a higher priority than honoring obligations to provide health insurance for cancer stricken retirees, or provide adequate police on crime-ridden streets. In the face of the real human struggles going on in Stockton, Assured Guaranty's anonymous statement is cold and cowardly.  I recommend that their senior management and shareholders attend the next City Council meeting to read it in person to the Council and the citizens of Stockton and explain why it is "unfair" for them to take a loss that is proportional to others.

The City and its leaders are certainly responsible for most of their own problems. They didn't have to sell those bonds in 2007, write unsustainable employee contracts, or make a host of other poor financial decisions prior to the recession.  I don't think cities should default on bonds. But the City, its employees, citizens and retirees are suffering serious consequences, and Wall Street clearly encouraged and was a partner to many of the City's risky bets. The future of an important American city is at stake, and the federal government isn't coming to bail them out like when the bankers got in trouble. Thus, I understand and support City Manager Bob Deis' response to the statement printed in the Stockton Record.
City Manager Bob Deis called Assured's statement arrogant.  The city will ask a bankruptcy judge to make records from the three-month mediation public so the world can see how Assured conducted itself behind closed doors, Deis said. 
Most galling, Deis said, was Assured's suggestion that Stockton should take more from its employees, like the city's understaffed Police Department. Crime in Stockton is rampant, he said. "They literally want anarchy in the streets." Deis said. "They don't care. They just want to get paid."

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