|Handouts for the rich on Wall Street. That happens only in America, I guess. What a country for the rich !|
Will Congress Bail Out
Gulf Coast Bondholders?
CONGRESS IS NO FEDERAL EMERGENCY Management Agency. Lawmakers are moving quickly to protect Wall Street from the fallout of Hurricane Katrina.
House Speaker Dennis Hastert, the Illinois Republican, says that Congress is seriously considering a federal bailout of municipal bondholders affected by the vicious storm. Many cities and authorities that were in the path of Katrina may be unable to meet interest payments come Oct. 1, because they can't collect the taxes needed to meet these obligations. The federal government is mulling some kind of guarantee, valid through the end of 2006, that would keep the issuers from defaulting.
Uncle Sam might also guarantee the creditworthiness of any new issues sold during that same period.
This largess would protect grandmas who bought tax-free bonds from cities and counties subsequently hit by the storm. Not coincidentally, it would also protect Wall Street lawyers and bond underwriters from legal action that might be engendered by interest-payment defaults. Congress would give grandma and other investors, such as mutual funds and pension plans, a bonus in addition to the regular interest payment: A federal guarantee would boost the prices of even the lowest-rated bonds in the affected areas to triple-A levels.[[Congress' guarantee would boost all prices to triple A bonds' levels, even if the given bonds never had a chance pre-Katrina of such ratings? ]
Fixed-income expert David Kotok, president of investment firm Cumberland Advisors in Vineland, N.J., says the law firms and their underwriting partners might very well have a legal liability in the event of a default, if it turns out that their risk disclosures to investors failed to anticipate events like a break in the New Orleans levees or the effects of a Category 4 hurricane.
New York securities lawyer Jacob Zamansky, who took on Enron at the behest of small investors, says that any reasonable investor would have wanted to know about the risks posed by the weak levee system to bonds issued by the City of New Orleans. He points out that a steep drop in a bond's market price can be as unsettling to an investor as a missed coupon payment would be.
However, the issuers hardly would be easy prey for plaintiffs' attorneys.
Columbia University law professor John Coffee, a securities-law expert, points out that municipal-bond offerings aren't registered, "and hence are not subject to the strict liability provisions of federal securities laws." Plaintiffs would have to prove a high level of recklessness by the writers of the bond's prospectus. He adds that, for older issues, the statute of limitations for such claims may have run out.
"The defendant's argument in response would be that everyone knew that a dead-on killer hurricane could wipe out New Orleans, and hence there was no material omission. Plaintiffs could still respond that the vulnerability of a New Orleans was not simply a matter of nature, but of the decrepit or poorly designed nature of its levees and other protections. The outcome is not inevitable, and that is what makes lawsuits," comments Coffee.
The bailout idea appears to have originated with the National Association of Bond Lawyers in its Sept. 7 letter to both the Department of the Treasury and the Internal Revenue Service (Re: Hurricane Katrina Relief and Rebuilding-Municipal Market Needs).
"Preventing defaults by these issuers will be an important step in maintaining investor willingness to supply new funds for the reconstruction effort that will be required," the letter said. NABL President Walter St. Onge III, of Palmer & Dodge in Boston, observed that similar steps were taken in the mid-1970s to bail out a bankrupt New York City.
Bond lawyers quickly found allies in Louisiana Republican Rep. Jim McCrery and Mississippi Republican Sen. Trent Lott. McCrery says bondholders never anticipated Katrina and should get federal help.
Kotok has some problems with McCrery's logic. If Congress were to follow through, then it might create an implied federal guarantee for bonds issued by other high-risk communities, he says.
The perception that Uncle Sam would protect bond holders from Mother Nature would distort the market's risk-reward pricing mechanisms. In effect, all bonds in communities along the San Andreas fault or in Tornado Alley would trade as if fully protected against natural catastrophes. This would pave the way for projects that otherwise wouldn't be built.
The Bond Market Association says that, nationwide, 50.2% of all munis are insured. Some of the municipal bonds in the Gulf Region were covered by AMBAC, MBIA, FSA, and FGIC. If the federal bailout takes effect, people who accepted a lower return of 10 to 40 basis points for their Gulf-area bonds in return for higher protection may in fact have wasted their money. The lesson for victims of Mother Nature's next big blow: Forget the roof, and stand on the shoulders of a bond lawyer.
President Bush seems to agree with Jesse Jackson on at least one thing: Residents of Louisiana and Mississippi should get the first shot at construction jobs as the area recovers from "Latrina." This is wishful thinking. In fact, one big beneficiary may be Mexico, because 24% of all U.S. construction workers are legal or illegal immigrants and most are from Mexico. Many of these immigrants send some of their pay home; the estimated cumulative total is more than $13 billion a year.
A 2004 study by Steven Camarota, director of research at the Center for Immigration Studies, suggests that immigrants are steadily pushing native-born Americans out of the construction industry. The decline in native employment, he says, is most pronounced in states with the biggest influxes of immigrants, including some along the Gulf Coast.
Ironically, the storm will delay progress on several immigration-control bills until next year. Meanwhile, reconstruction efforts are proceeding, and President Bush has suspended the Davis Bacon Act, which sets a wage floor for federal projects in different U.S. regions. Critics claim this will invite contractors to hire illegal immigrants, who will work for much less than U.S. citizens.
All rights reserved.