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Huge profits made on CPS market uncertainty

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Illinois

The Chicago Board of Education was desperate for cash. Two Wall Street players were willing to lend it — at a price.

J.P. Morgan Chase & Co. and Chicago-based Nuveen Asset Management have made realized and paper profits exceeding $110 million on purchases this year of $763 million in Chicago Public Schools bonds. The school system needed the money to replenish its dwindling coffers before the new school year and to build and repair facilities.

The school system’s bonds are a favorite for John Miller, Nuveen’s co-head of fixed income, who said the firm bought when the market feared a default, a concern he called overblown. “At the end of day, this school system is critically important to Chicago — to the whole country really,” he said.

“We took a period of market risk on behalf of our client when they needed it most and the market has recognized their improved financial position,” a J.P. Morgan spokeswoman said. […]

Prices of outstanding Chicago school bonds were hit in 2013 and 2015 after defaults by Detroit and Puerto Rico. Illinois Gov. Bruce Rauner called for a state takeover of the school system and for a potential bankruptcy filing over the past year and prices fell below 75 cents on the dollar.

Nuveen determined that the default risk was far lower than that implied by the bond prices.

Smart move by Nuveen and Morgan. They figured out what others missed: The governor was just jaw-boning and that his ideas wouldn’t actually be put into place. They wound up making out like bandits.

* Meanwhile, this is from an SEIU Healthcare union media advisory…

Taxpayers to Rauner: Yes or No — Will you stand up to banks on near $1 billion payout on toxic swap deals?

Coalition demands that governor call on bank CEOs to extend deadline on ‘toxic’ interest rate swap deals

SPRINGFIELD—College professors, students, home healthcare workers, child care providers and others will call on Gov. Rauner to save taxpayers a near $1 billion payout to big Wall Street banks, money that instead could fund vital social services and education programs now being slashed by the Rauner administration.

The coalition will make the demand during an 11 a.m. press conference on Tuesday, Oct. 4, in the Blue room at the State Capitol Building, 301 S. 2nd St. Several Wall Street banks hold documents called Letters of Credit on toxic interest rate swap loans. The letters of credit expire on Nov. 27, triggering an immediate payout of hundreds of millions of dollars in addition to additional fees and penalties unless the banks extend the letters of credit.

Wanna guess who initiated those “toxic” swaps? Rod Blagojevich, SEIU’s bestest pal. Somehow, that isn’t mentioned in the release.

* But Blagojevich’s involvement is highlighted by the governor’s office today…

Rauner Takes Steps to Reduce Risks from Blagojevich-Quinn Inherited Financial Deals

Administration Spent Last Year Working to Reduce Taxpayers Financial Risk

SPRINGFIELD – Over the past several months, the Rauner Administration has taken steps to reduce the state’s financial risk on interest rate swaps and letters of credit. The Governor’s Office of Management and Budget (GOMB) recently completed renegotiations with all the banks that hold the State’s swaps to reduce the state’s financial risk.

“Governor Rauner inherited these swaps and letters of credit, which have been hanging over the heads of Illinois taxpayers for years,” Rauner spokeswoman Catherine Kelly said. “The Rauner Administration has successfully negotiated better terms for Illinois’ taxpayers, which have reduced our financial exposure and increased our ability to direct the state’s limited resources to education and social services.”

The new terms are more favorable to the state and reduce the state’s financial risk. Under the new terms, the State is less likely to have the swaps terminated and owe a payout to the banks because the credit rating thresholds that allow the banks to terminate have been lowered. These new terms are better for the State than the terms agreed to by the Quinn administration in 2013 and the Blagojevich administration in 2003.

The Governor’s Office of Management and Budget has made negotiating with the providers of letters of credit a priority with the goal to renew or replace them prior to the expiration date of November 27, 2016. […]

In October of 2003, the Blagojevich Administration negotiated five separate, interest rates exchange agreements totaling $600 million. At the time they cost the state 4.16% in interest and fees, they now cost Illinois 6.79% in interest and fees.

The payouts the State would owe to banks now if all the swaps were terminated is approximately $150 million. If the letters of credit are not renewed or replaced, there would be additional obligations on the State.

posted by Rich Miller
Tuesday, Oct 4, 16 @ 11:01 am

Comments

Blago’s gone. For a while now. Is The Governot going to help solve this or just push IL further towards destruction?

Comment by sal-says Tuesday, Oct 4, 16 @ 11:09 am
Wow, I didn’t realize those extortionate payday cash loan places could handle amounts that large. /s

Comment by Earnest Tuesday, Oct 4, 16 @ 11:18 am
Dear Governor, please see if someone will take a pass on some huge profits….

Good luck with that…

Comment by OneMan Tuesday, Oct 4, 16 @ 11:19 am
Wow, 14% gain in less than a year. I wonder what they can do with a $10 billion in general obligation bonds issued in one trench?

Comment by yeah Tuesday, Oct 4, 16 @ 11:25 am
The story lacks the important narrative about the risk involved in investing in CPS. By their own (hired E&Y) financial analysis, they’re projected to spend themselves into insolvency. Lets talk to John Miller in 10 years…

Comment by BK Brah Tuesday, Oct 4, 16 @ 11:29 am
Meantime back on planet Earth, my kids came home yesterday with news that the CTU strike starts on Monday (no school) and the principal sent an email about that possibility. I really hope it settles before then…

Comment by 32nd Ward Roscoe Village Tuesday, Oct 4, 16 @ 11:31 am
Rainer did a great job of ginning up those interest rates with the bankruptcy and takeover talk.

Comment by Cathartt Representative Tuesday, Oct 4, 16 @ 12:05 pm
Within the last week S&P Global Ratings again dropped Illinois’ credit rating by one more notch. S&P also said that another downgrade could follow for the state with the lowest credit rating in the nation. My bet is that the banks see that the risk associated with the state’s interest rate swaps is high and going higher still. I look for the price for new letters of credit to be higher, not lower, if they are available at all to compensate for the increased risk to the banks. I see the possibility of the banks taking what they can in profits and leaving. Another loss for the taxpayers may be at hand.

Comment by Small town taxpayer Tuesday, Oct 4, 16 @ 12:07 pm
The banks and the rating agencies are behaving badly?
At the expense of our municipalities?
I’m shocked. Shocked.

Comment by TinyDancer(FKASue) Tuesday, Oct 4, 16 @ 12:13 pm
Would the vig be lower if Illinois just went and got a Payday Loan? /s

Comment by Touré's Latte Tuesday, Oct 4, 16 @ 2:53 pm
Were I Rauner, I would just hand the whole project over to Mike “The Man that Shot Wells Fargo” Frerichs. After saving $30 billion in a day, Top Shot Mike should have this hammered out before lunch.

Comment by Arthur Andersen Tuesday, Oct 4, 16 @ 3:29 pm
“Were I Rauner, I would just hand the whole project over to Mike “The Man that Shot Wells Fargo” Frerichs. After saving $30 billion in a day, Top Shot Mike should have this hammered out before lunch.”
—————-

“Top Shot Mike”…… LOL

His credentials for handling such a delicate mission would likely start out with…

“I’m Really Tall”.

What a rube.

Comment by Anon Downstate Tuesday, Oct 4, 16 @ 4:21 pm
This should not surprise anyone. CPS was on the verge of defaulting. When someone borrows at near default, the interest rate will be high. Lending 100.

Comment by Ron Tuesday, Oct 4, 16 @ 5:12 pm
It’s called reading comprehension OW. I never mentioned business tax climates, I mentioned state and local tax burden. It’s right there on the Tax Foundation website.

Comment by Ron Tuesday, Oct 4, 16 @ 5:16 pm