Sorry Arnold, TARP Can't Be Used to Bail Out the Golden State

California is on its own. At least that is the conclusion based on Tim Geithner's earlier statement that TARP cash can not be used to bail out the Golden (or any other) state.

The law “does not appear to us to provide a viable way of responding to that challenge,” Geithner told a House Appropriations subcommittee in Washington today. Among the hurdles: Money from the Troubled Asset Relief Program is reserved for financial companies, he said.

The Treasury chief said he will work with Congress to help states such as California that have been battered by the credit crunch and are struggling to arrange backing for municipal bonds and short-term debt.The municipal bond markets are “starting to find some new balance and equilibrium,” Geithner said.

Three observations: i) when did "the law" ever stop T3 before; ii) If by new equilibrium Geithner means 0, then he is right, iii) isn't Barney Frank all over the task of providing US guarantees to munis for ever and ever, after extensive discussions with T3 and Dick Bove have revealed that there really is no other way to prevent the complete collapse of the world's fifth largest economy (which if the miles of empty containers at Long Beach harbor is any indication, then the world must be is in some serious trouble).

Wisconsin Democrat David Obey sums it best "We don’t want Uncle Sam to be Uncle Sucker." Of course, there is nothing that T3 and Barney would like more. Unfortunately for California, it may be too late. While its CDS has tightened recently, nothing fundamentally has changed from the time when its CDS hit well over 450 in late 2008. It is merely a matter of time before the state's risk goes back to those levels again from its current 200bps tighter price.

Disclosure: no California CDS exposure.

Comments

[rubbabubba:]

T3?

May 27 10:04 AM

[Henry Buttal:]

It will be interesting to see what California does. IMHO, the state legislature itself hasn't actually pulled out all the stops in addressing this issue.

For example, I certainly would be interested in California state bonds at a high enough interest rates.

Or perhaps CA could be the first state to issue covered bonds?

May 27 10:57 AM

[Leftfield:]

The fact about municipal/state bailouts is that we would be indebting ourselves further to preserve massive overhead and waste. Actually that's the fact about all of these bailouts. That's the plan, folks.

May 27 11:23 AM

[mdmrjsds:]

On May 27 08:37 AM PastTense wrote:

> California has 55 electoral votes. So there definitely will be a
> bailout--purely for political reasons.

You haven't factored in the effect of our two party system. Who else are Californians going to vote for? Republicans? For a bailout? These are something-for-nothing voters. They are locked in. Their electoral votes are irrelevant at this point because they don't have a viable alternative option. No matter what the Democrats do, these folks will vote Democrat.

So there will be lots of sympathetic noises, and some symbolic gestures, but no substantive action. Even the ignoramuses in never never land are beginning to see that actions have consequences, and starting to look out beyond the next election, as others have said above.

Wait a minute! Arnold just needs to spin this as a systemic risk. Somehow invoking China if possible. And Bill Gross just needs to pull a few strings. And the feds will open the tap somehow and there will be manna from heaven for California. No problem. :-)

May 27 11:32 AM

[Mad Hedge F...:]

The state's voters need to face reality. California voters resoundingly rejected all five out of six budgetary measures by an overwhelming two to one margin, setting the stage for a new financial crisis. Trashed at the polls were plans to create a rainy day fund, improve education, borrow from the state lottery, and pay for children’s services and mental health. Only prop 1F, freezing legislator pay raises during deficit years, passed. The state now has to immediately cut spending by $21 billion by laying off 10,000 teachers, 5,000 other state workers, and shortening the school year by seven days. It will raid every city and county government for additional cash. The state will also release 20,000 non violent state prisoners and suspend maintenance and construction on thousands of projects. My home town high school is closing their sports and music programs. If the state’s latest round of $6.5 billion in bond issues did not carry federal government guarantees, they would have been wiped out in the market. No doubt our well tanned, Austrian immigrant governor, Arnold Schwarzenegger, who was in Washington DC for a CAFE photo op with Obama, will be sent back to the gym to pump iron sooner than he thinks.

May 27 12:06 PM

[Gedankonomist:]

California needs to learn a lesson: you cannot have so many environmental and other regulations and then expect to not have to pay for them.

May 27 12:15 PM

[Duude:]

While I agree that the 55 electoral votes are hard to ignore, Californians don't necessarily agree with a bail out either.
The fact is as a large state wealthy Californians have been subsidizing smaller states for decades. Large states have always, always put more into the pot and got little back while little states put in little and get all of it back and then some. The call for bail out might not be as unfair as many believe.
But many Californians see this as a moment in time much like 1978 when the Jarvis/Gann combination produced proposition 13 which changed the property tax by initiative. We don't want the Feds to rescue the state. Legislators have to do as we're telling them. STOP IT! No new taxes. Cut, Cut, Cut. Then come November 2010, you're outta there!!!


On May 27 08:37 AM PastTense wrote:

> California has 55 electoral votes. So there definitely will be a
> bailout--purely for political reasons. The problem is what happens
> next year and the year after? I think the Federal government will
> bail California out once but I think there will be strong resistance
> to further bailouts--and I see the economy continuing to be not good
> and California continuing with its disfunctional political culture.

May 27 12:15 PM

[mallarde:]

Cutting services to illegal aliens would save billions of dollars. Let's start talking about that in California.

May 27 12:30 PM

[scfranklin94:]

If the state of California can save the bulk of $21 billion just by cutting back on the school year by a week, they should let kids off for a month, it's not like the kids are missing out on anything (the state has a 20% dropout rate as it is).

May 27 12:43 PM

[scfranklin94:]

On May 27 12:15 PM Duude wrote:

> The fact is as a large state wealthy Californians have been subsidizing
> smaller states for decades. Large states have always, always put
> more into the pot and got little back while little states put in
> little and get all of it back and then some. The call for bail out
> might not be as unfair as many believe.

This only became true when the military started closing bases in the 1990s, before then California got more from the Feds than they paid in taxes.

May 27 12:49 PM

[wildcat42:]

I wonder if we're not witnessing a bit of a poker match between the States and the federal govt. In recent weeks we've seen some states declare their sovereignty (i.e. Texas), saying the federal govt isn't going to tell them what to do. In response, we have the Fed saying, "the law" doesn't "allow" them to print money to bail them out...but "the law" gives them the ability to bailout trillions in federal and public debt? This is good ol' American politics doing what it does best: serve the best interest of its politicians and the people underwriting their political agendas (the rich and ruthless). The States hold the people (what the politicians want), while the Fed holds the ability to print cash (what the people want). Please forgive my pessimism, but this whole thing seems a bit like a satire on capitalism and democracy. Meanwhile, the Fed has been functioning like you might expect to find in a socialist dictatorship.

May 27 01:16 PM

[Alfredo Mar...:]

They'll find a way around the rules of TARP if they want to, just like they found a way to give money to the auto companies, even though they weren't financial institutions. Make no mistake, TARP was a blank check for politicians to spend however they want.

However, there will be a MASSIVE backlash if California is bailed out. Every other state that has a deficit (which is nearly all of them) will also have their hand out, and voters in other states will be outraged that they had to cut services and raise taxes while Californians did not.

Also, people instinctively hate the state of California, they view that state as the epitome of irresponsibility. It would be like bailing out a tobacco company.

California is about as reliable a Democrat vote as any state can be, it's hardly a swing state. Republicans will have no problem opposing any sort of bailout for California, and making it a very potent political issue in the next election.

May 27 03:02 PM

[MichaelJ007:]

The GOV will most likely not bail them out. Then every state will be begging for money. The republicans won't try to weasel their way into CA with promises of bailouts and they certainly won't be able to criticize the DEMS for not giving CA one. I think this is were the bailout buck stops.

May 27 04:45 PM

[CLH:]

CA has shown (as did the USSR in 1990) that socialism does not work. As it collapses, the rest of the country will learn and Obama will also collapse.

No one is interested in giving their money to those who are lazy.

May 27 06:14 PM

[Bob Mc:]

Until California takes the following types of actions, they can stew in their own juice as far as I am concerned. The citizens of California want all of the amenities that a government can offer, but they don't want to pay for them. We in the other 49 states have our own problems. Leave us alone to solve ours and you start solving yours. Enough with the excesses of why you are unique and deserve special attention. You are where you are because of the decisions you and your inept legislature have made.
May I suggest that you consider the follow as initial steps to righting your leaky ship of state.
1 - open up the coast to drilling,
2 - launch a legimate program to cut all social services to illegal immigrants and begin deporting them,
3 - demand that sanctuary cities cease all special privileges to illegal immigrants and adhere to all federal laws regarding their treatment,
4- take the necessary actions required to reduce all state employee compensation and pensions to levels comparable to other states,
5- reduce social service spending to 2002 level escalated only for inflation and population growth,
6- eliminate all non-essential state programs, and
7- take all actions required (e.g. constitutional convention) to take the governance of the state back from special interest groups.

May 27 08:08 PM

[devassocx:]

Even under present conditions, California's leaders are still in
denial...they are trying every trick in the book to keep the insanity
going.

California citizen's are becoming increasingly frustrated with
their government.

Probably the only way out of this is to let the state go over the
cliff and then press the reset button and reform a more
rational government.

One poster said he would be a buyer of California bonds at
the right interest rate. I wouldn't touch them at any rate as
it is a very bad bet.

May 27 08:11 PM

[jhartz:]

Why not sell California to the Chinese government for all the Sovereign debt of ours they hold and another two hundred billion dollars worth of cheaply made tezxtile goods?

If we did that, we'd be rid of about half the illegal aliens in this country and in a position to have about another thousand miles of hard to secure border to act as a buffer to further illegal immigration.

I can see all those Chinese and Mexican illegals trying to walk across Death Valley in order to get to Las Vegas, the true land of milk and honey. Ih, I forgot, Las Vegas is in its own crashed economy. At least there are a surplus of cheap rental properties to house the illegals until they can find jobs.

May 27 10:28 PM

[a. palmer jr.:]

Not just California....your state is next. The flood of illegals is everywhere...We should have put Tom Tancredo in as President. We would have at least had a sympathetic ear in the White House. Right now we probably have an illegal as President,, who knows? If we don't start doing our own work instead of hiring it out to the cheapest place China and Mexico will own us!

May 27 11:44 PM

[JPPennypacker:]

Perhaps the Governator can declare the State of California to be a bank holding company. Such a change would subject California to stricter federal oversight, but by borrowing a page out of the playbook of Goldman and Morgan Stanley maybe California could get some of that precious Tarp Money too.

May 28 12:59 AM

[Blackeyebart:]

I love it: California is the USSR!
So I guess Hollywood is the Kremlin
Arnold is Leonid Brezhnev
and Silicon Valley is the Volga Blazing Star Tractor Factory.

You should report that lazy worker to the Glorious Peoples Committee and Social Club. They would shoot the B****ard.


On May 27 06:14 PM CLH wrote:

> CA has shown (as did the USSR in 1990) that socialism does not work.
> As it collapses, the rest of the country will learn and Obama will
> also collapse.
>
> No one is interested in giving their money to those who are lazy.

May 28 04:21 AM