New Definition for “Junk Bonds” By David Saint-Onge Just when you thought you’ve heard it all, here’s but another example of economic craziness.
ment is that these states also gain added transparency in the secondary market, as well as garnering the "patriotic" element by allowing more In an article written by Ran- residents to purchase debt. dall Jensen (California Eyes Mini Bonds, The Bond Buy- You have got to be kidding er) dated May 16, 2011, Cali- me; transparent patriotic retail fornia Treasurer Bill Lockyer investors. The simple truth is is pushing a legislative bill this proposed legislation that would allow the state, the comes at a time when uncerlargest issuer of municipal tainty about passage of a baldebt in the United States, to anced budget has caused take the unusual step of sell- California to hold back on ing $25 bonds on the New issuing new debt. As the largYork Stock Exchange. The est debtor state in the Union, proposed legislation would California is having trouble change state law by increas- selling more debt on top of ing California's reach into the the debt it already has. If the retail market. institutional investors and those with the capacity to purA representative of the State chase $1,000 denomination Treasurer’s Office argues that bonds won’t buy your debt, “the more retail you have, it perhaps the only option you puts you in a better position to have is to try to sell the debt get the best possible price to uninformed retail investors when you go to the institu- under the guise of being patritional side”. An analysis of otic. the bill by state Assembly staff said the product could Despite anyone’s political potentially "open up a largely leanings, it is reasonable to untapped investor base." assume that institutional investors and other purchasers Now at first glance this may do their homework. They not register as unusual. The likely either make a living or State of Vermont sold similar supplement their earnings and mini bonds in 2009, as did lifestyle by buying and selling New Jersey in the late 1990’s. stocks, bonds and other inApparently Vermont and sev- vestment instruments. This eral other states sold entire process has been around since bond issues to retail investors the very beginning of the because of concerns about in- country and allows the laws stitutional markets after the of supply and demand to dicfinancial collapse. The argu- tate what can be sold and at
This article is a re-printed from the June 2011 edition, as approved by the UP Business Today
what price. If you are selling something no one wants, you won’t sell very much of it. On the contrary, if you have a great product or service, everyone wants it. In this instance, municipal debt is no different than cell phones and hamburgers. California issued more than $99 billion of debt from 1996 to 2009, $34 billion more over the same period than the second largest national seller, New York City, according to Thomson Reuters. According to Mr. Jensen, the State Treasurer’s office has noted the state has $37 billion of debt that is authorized but not yet issued. Could it be that this additional debt has not been issued because no one wants to buy it? So what is California to do? Well, the State Treasurer has been diligently working on a marketing campaign targeting retail investors, including newspaper and radio ads, and a website, www.BuyCaliforniaBonds.c om. All of this under the guise of getting patriotic retail investors to do what professional investors will not do; buy more bad debt. Governor Jerry Brown is expected to release a revised budget proposal in late May outlining plans to close a $15
billion budget deficit after he was unable to persuade lawmakers to call a special election asking voters to extend temporary tax increases. The state's fiscal year ends June 30 and California lawmakers rarely adopt a budget on time. In 2010 the budget wasn’t adopted until October 8. In a recent article in the Wall Street Journal (Austerity Chills the Ardor for Muni Debt, Michael Corkery and Jeanette Neumann, April 20, 2011) in which I was quoted as stating, “you get to a saturation point where too much debt is too much debt’, the reality of life is that everyone must live within their means. Business does it every single day; why can’t the government? David Saint-Onge is President and Principal Strategist for Black Ink Assets (www.blackinkassets.com and www.twitter.com/ YooperBiz), a business consulting company providing organizational assessment and efficiency performance services, business growth and sustainability guidance, strategic information technology consulting and technical services, and development of organizational transition plans and effective owner exit strategies.