Big Banks to Cali Treasury: Trust Me! What’s the Worst that could hapen?


Citi, JPMorgan and Goldman want to sell your debt as long as they don’t have to bid to underwrite it. What could go wrong?

If California were willing to forgo competitive bidding for a $4.5 billion bond offering, the banks promised more orders from individuals and a lower bill to the taxpayers. The firms insisted that by negotiating with them, the state would benefit from its special relationship with the Wall Street troika and wind up with what two underwriters called a salutary “buzz” to boost demand for the debt.

When the October offering failed to sell as planned, California was forced to accept 8 percent less money than it needed and to pay as much as $123 million more in interest than the banks said was sufficient for the market. And the threesome made $12.4 million on the deal, contributing to record bonuses in the securities industry a year after getting a total of $80 billion in a federal bailout.


When the New York banks’ promises to California proved unreliable, Lockyer, 68, not his underwriters, tried to explain the miscalculation to taxpayers.

“It turned into a bad week for bonds,” the treasurer said in an Oct. 9 interview. “This seemed to be a very hard week with some headwinds for issuers.”

The underwriters left Lockyer “standing on the platform alone,” said Christopher Taylor, former executive director of the Municipal Securities Rulemaking Board in Alexandria, Virginia, a self-regulatory organization. Taxpayers “probably didn’t get their money’s worth because California only got someone taking orders,” he said. “They didn’t get somebody out there that had any really strong incentive to sell.”

Banks don’t want “any unsold bonds hanging around,” so they prefer to help states set rates and see if the bonds sell, as happens in negotiated deals, Taylor said. If demand falls short, the dealers say, “Listen, we can’t sell this” without higher yields, he said. “It’s a wonderful world that the dealer community has created — just fees, no risk.”

via California Bonds Fail on Advice Bill Lockyer Couldn’t Refuse –

Charge 8% less for purchase of tax funded debt and pay out an unexpected $123 million dollars in interest to the buyers of that tax funded debt. Basically, California sold some debt, to increase their debt. Plus fees to some Big Banks. Good thing they didn’t go through that crazy bidding process. Lockyer explained it as “a bad week for bonds”. That is the B.S. he was fed by his underwriters. It was a bad deal any week of the year.