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Rauner has November deadline to tackle bad bond deal

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Illinois

* BGA…

Gov. Bruce Rauner, who previously promised voters he would bring his well-honed business skills to get Illinois back on track, will be tested in coming months as he tries to fix a bad financial bet made more than a decade ago between the state and Wall Street banks.

This fall, the governor will decide whether to fight the banks or concede to at least $150 million in penalties that potentially must be paid to the institutions as the result of a financial arrangement that backfired – a cost borne by taxpayers.

When Illinois officials prepared to sell $600 million in bonds in 2003 for general spending uses, they were concerned that rising interest rates would drive up the cost to repay the debt. To protect themselves, they entered into contracts known as swaps that are supposed to protect against interest rate spikes. Such contracts work to keep the repayment of debt at a steady rate with few surprises.

Trouble is, the contracts are designed to work in a time of rising interest rates. After the financial markets collapse of 2008, rates plunged.

Through last year, Illinois paid almost $400 million in interest and fees for the single $600 million bond issue, a figure that would have been tens of millions of dollars less had the state entered into a lending agreement with a flat interest rate of around 4.75 percent, according to one analysis. (Bonds are essentially loans to government. Banks act as middlemen to sell the debt in pieces to investors.) […]

The unexpected drop in interest rates would have been bad enough. But the state’s deteriorating financial condition – due in part to its unpaid pension obligations – made matters worse. Continued downgrades by major bond rating agencies of the state’s credit rating can force a termination of the swaps – forcing the state to pay a penalty in the range of $150 million. […]

Rauner has three choices to mitigate the issue [before a November deadline on expiring letters of credit]. He can pay the full penalty to the banks in order to get out of the swaps and refinance the bonds at a lower rate. He can continue the current arrangement, although new guarantees will likely raise borrowing costs. Or he can sue the banks or use the threat of litigation as leverage to get a better deal, as some allies advocate.

Oy.

posted by Rich Miller
Thursday, Sep 8, 16 @ 9:34 am

Comments

Ah, the prospects of a pro-business administration threatening litigation to get its way. This really is a turn around for Illinois.

Comment by Michelle Flaherty Thursday, Sep 8, 16 @ 9:39 am
I’m betting he’ll go with option three, litigation.

He’s a venture capitalist not a business man.

Litigation in a huge part of the venture capitalists wheelhouse.

Comment by Honeybear Thursday, Sep 8, 16 @ 9:45 am
==To protect themselves, they entered into contracts known as swaps that are supposed to protect against interest rate spikes.==

It’s like insurance. Had rates skyrocketed, and if the state had not entered into these contracts, everyone and their dog would be screaming bloody murder about why we didn’t protect ourselves.

Comment by Fusion Thursday, Sep 8, 16 @ 9:50 am
There are just some fights you are not going to win. IMO, this is one of them.

First off, currently Illinois is a financial basket case. We made a stupid deal back in 2003, but we were not alone. Whether we like it or not, we need to keep open what access to financial resources that we still have available to us. Particularly if we are going into a financial downturn.

Also, other entities have already fought these battles over interest rate swaps, and have had mixed success, at best.

People want to get mad over this? Aim at the correct target - The Federal Reserve Board. They are the folks who are shilling for the TBTF (Too Big To Fail) ‘Banksters’ and Wall Street by keeping interest rates low and rewarding the financial casino that is Wall Street.

We just get to clean up the mess and pay the price.

Comment by Judgment Day Thursday, Sep 8, 16 @ 9:59 am
===Or he can sue the banks or use the threat of litigation as leverage to get a better deal, as some allies advocate.===

I’m not really sure on what grounds he would argue given the contracts were voluntarily entered into.

Comment by Anon Thursday, Sep 8, 16 @ 10:00 am
Because… Blago?

Comment by Ron Burgundy Thursday, Sep 8, 16 @ 10:00 am
Some backgrounder from June- Civic Federation

https://www.civicfed.org/iifs/blog/illinois-announces-reduced-swaps-risk-and-completes-bond-sale

Comment by Anon221 Thursday, Sep 8, 16 @ 10:05 am
Fourth option: “because Madigan!”

Comment by Donald Segretti Thursday, Sep 8, 16 @ 10:10 am
Let’s get’er done superstars!

Comment by Flynn's mom Thursday, Sep 8, 16 @ 10:11 am
The first thing to do to get out of a hole is to quit digging. Pay it off and refinance.

Comment by Facts are stubborn things Thursday, Sep 8, 16 @ 10:21 am
–The first thing to do to get out of a hole is to quit digging.–

Which is why revenue is a must not an option.

The sooner the better.

We can’t cut our way out of this. We’re eating our seed corn at an alarming rate right now.

Comment by Honeybear Thursday, Sep 8, 16 @ 10:39 am
Nice re-spin, Rich. Change the story to make it a Rauner problem.

Comment by Driveby Thursday, Sep 8, 16 @ 10:40 am
===Change the story to make it a Rauner problem===

Another pathetic childish victim.

He’s the governor. This wasn’t caused by him, and that’s obvious from the post. But it’s on him to fix it.

Comment by Rich Miller Thursday, Sep 8, 16 @ 10:45 am
Not sure why litigation has any support. I can see the State losing time/money in litigation and losing. The State made the deal with financial firms fair and square.

Comment by BK Bro Thursday, Sep 8, 16 @ 10:46 am
Fusion is correct.

Comment by Ron Thursday, Sep 8, 16 @ 10:50 am
Its options 1 or 2 only. The swaps were arm’s-length contracts. Because the deal didn’t work out for the state is just how it goes; this was risk associated with the contracts. A lawsuit ain’t going anywhere — just watch if Chicago tries this stunt with its swaps.

Rauner’s administration will have to bite the bullet on this one. Of course, The Bruce and his Superstars will blame prior administrations and decision-makers, and like in most other instances they won’t be wrong … but it won’t make addressing the growing financial problems any easier.

Comment by Deft Wing Thursday, Sep 8, 16 @ 10:50 am
Driveby
When you become governor you inherit the problems. Whether you created them or not Governors own. Raunner playing victim again as always.

Comment by Old and In the Way Thursday, Sep 8, 16 @ 10:51 am
Or, Mr. Moneybags can buy the banks. Problem solved!

Comment by State Worker THX 1138 Thursday, Sep 8, 16 @ 10:54 am
I would be happy to see anything positive happen due to this governor. Please alert us when it happens, seriously.

Comment by James Knell Thursday, Sep 8, 16 @ 10:58 am
He’s too busy doing photo-ops for Facebook.

Comment by The Fool On The Hill Thursday, Sep 8, 16 @ 11:00 am
These swaps (structured products) are like adjustable rate mortgages - the rates can go up or down - they “adjust.” These deals earn big opaque fees for the banks and come with an unreadable prospectus. Who was the financial advisor?

So, anyone who enters into one of these deals is essentially gambling - rolling the dice, hoping that the rates break in their favor.
Municipalities should not be gambling with taxpayer money, and financial advisors should not be selling them.
They should go after the “geniuses” who were paid to advise them. This is a clear breach of fiduciary responsibility.

Comment by TinyDancer(FKA Sue) Thursday, Sep 8, 16 @ 11:11 am
I seem to be the only one here stunned by the fact that Illinois borrowed $600 million and has paid $400 million in fees and interest.

Comment by Sir Reel Thursday, Sep 8, 16 @ 11:16 am
Might as well try option 3. Research banks’ contributions to Blago around that time frame, make sure they know that it’ll be ugly, and try for a settlement.

Comment by Robert the Bruce Thursday, Sep 8, 16 @ 11:16 am
Does the governor need legislative approval for any of the three options presented?

Comment by Anony Thursday, Sep 8, 16 @ 11:17 am
===I seem to be the only one here stunned by the fact that Illinois borrowed $600 million and has paid $400 million in fees and interest.===

As stunning as that reality is, most people who have been following Illinois politics for fifteen years consider it par for the course….

Comment by Ducky LaMoore Thursday, Sep 8, 16 @ 11:29 am
@honeybear 945am

I’d venture to say that any of the Sharks on TV are people who are genuine businessmen/women.

Bruce, and the National guy he has endorsed, are not even in the same class.

Comment by Doug Simpson Thursday, Sep 8, 16 @ 11:40 am
== the contracts are designed to work in a time of rising interest rates==
Like 3% annual pension increases. Oops.

Comment by Excessively Rabid Thursday, Sep 8, 16 @ 12:00 pm
===Like 3% annual pension increases. Oops.===

I wonder why the geniuses who are trying to find a constitutional pension solution haven’t offered a voluntary trade of the 3% annual increase to an inflation-indexed increase. I’ll bet there would be more than a few takers who remember the double-digit inflation of the 80’s as well as the low single digit inflation of the 00’s. It might help the state’s solvency in the near term, although there is a budget-busting risk if things ever return to the way-over-3% days.

Comment by Six Degrees of Separation Thursday, Sep 8, 16 @ 12:10 pm
Sir Reel 11:16, count me in, too.

Comment by Six Degrees of Separation Thursday, Sep 8, 16 @ 12:12 pm
Does anyone know who among Blago’s friends got the fees on those stupendous deals and how much. We’re these the the Bear Stearn deals for which Hirchen and Bob Shelander got richly paid for and part of the money went to Rezko in A deguised loan which wasn’t repaid?

Comment by Sue Thursday, Sep 8, 16 @ 12:12 pm
How is this not Rauner’s fault? These were legitimate agreements as long as Illinois maintained its credit rating.

The credit rating dropped because of the expired tax increase that Rauner did not want extended and the lack of a FY16 budget after Rauner vetoed most of it. So Rauner, through his inability to lead, is going to cost taxpayers $150 million.

Comment by A Jack Thursday, Sep 8, 16 @ 12:39 pm
Rauner had 0 control over the sunset clause in the tax increase.

Comment by Anonymous Thursday, Sep 8, 16 @ 12:41 pm
A-Jack- Rauner inherited this pile. If these are the contracts I think they were- they stunk from the Get Go

Comment by Sue Thursday, Sep 8, 16 @ 1:00 pm
this isn’t anything different than the ’string’ attached to the lottery manager deal - or as MFlaherty pointed out, constitutionally protected pension benefits.

There is nothing to fix - just pay up and move on…

Moving on obviously requires combination of revenue increase and spending cut - simple economics that quickly get ignored because of subjective (political) mental filters.

Too much energy and attention on trying to argue subjective points instead of calling out the motives behind the subjectivity - personal interest overriding public interest…

Comment by anon Thursday, Sep 8, 16 @ 1:18 pm
Not sure why people are surprised that so much interest is paid. On a 100,000 mortgage…in the beginning most of the payment is towards interest. And it comes with Free Government Socialist Welfare Entitlements too!

Comment by Doug Simpson Thursday, Sep 8, 16 @ 2:24 pm
Exactly right, Doug Simpson.

I made up an example of a $225k 30 year 5.4% fixed mortgage and checked the balance after 13 years.

Just over $210k in payments in that timeframe, and the loan balance was still around $180k. (Apologies for the lack of precision-financial calculator needs a battery so I had to do a chunk of this the old-fashioned way.)

This concludes today’s lesson on “the miracle of compound interest.”

Comment by Arthur Andersen Thursday, Sep 8, 16 @ 3:22 pm
These deals were ill advised from the get go. The State was insuring against a sharp rate rise and frankly the decisions were IMO driven by who was getting rich off of the fees.

Comment by AA Thursday, Sep 8, 16 @ 4:24 pm
4:22, no offense, but the handle AA is spoken for. I’m not arguing your point at all, particularly in light of the State selling a huge fixed rate deal at almost the same time. I would like to know who got well off this deal, though.

Comment by Arthur Andersen Thursday, Sep 8, 16 @ 5:03 pm