bankruptcy « Citizen Economists

MF Global and HSBC case

By Bron Suchecki, on December 13th, 2011

As usual, Zero Hedge and others hype a story way beyond the reality (see here for the Bloomberg story), such as:

ZH: ”is whether or not MF Global was rehypothecating (there is that word again), or lending, or repoing, or whatever you want to call it, that one physical asset that it should not have been transferring ownership rights to under any circumstances.”

TF: “A lawsuit such as this one could easily bring about the total destruction of the Comex/LBMA-based, fractional bullion banking system”

Here is a suggestion, read the actual Interpleader Complaint for the facts:

1. Mr. Fane and MFGI entered into five COMEX gold contracts and three COMEX silver contracts relating to the Property. HSBC is the depository for the Property pursuant to a certain Gold Delivery Point Agreement and a certain Silver Delivery Point Agreement entered into between HSBC and the New York Mercantile Exchange, Inc.

2. By e-mail dated October 25, 2011, MFGI notified HSBC that “MF Global’s customer Mr. Fane would like to take possession of [the Property] and move [the Property] to his account at Brinks (sic). I have already canceled for load out. Customer will advise of date and time.”

3. Mr. Fane did not contact HSBC to request that the Property be transferred to his account at Brink’s prior to the Commencement Date.

4. By letter dated November 18, 2011, HSBC, through its undersigned counsel, notified the Trustee that it had possession of the Property. HSBC also notified the Trustee, in light of HSBC having received instructions from MFGI prior to the Commencement Date to transfer the property to Mr. Fane upon his request, that HSBC would act in accordance with MFGI’s prior instructions barring an injunction or contrary instructions from the Trustee.

5. By letter dated November 21, 2011, Mr. Fane requested that HSBC transfer the Property to his account at Brink’s.

6. By letter dated November 22, 2011, the Trustee, through his counsel, asserted to HSBC that the Property constitutes customer property under Part 190 Regulations of the Commodity Futures Trading Commission and that the treatment of the Property must be administered by the Trustee. The Trustee further instructed HSBC not to release the Property to Mr. Fane.

7. By letter dated November 22, 2011, HSBC notified Mr. Fane that the Trustee had instructed HSBC not to release the Property to him and that the Trustee asserted an interest in and claim to the Property.

Not being a lawyer, I read this as “before you went bankrupt, you said I could have my metal”, “yeah, well, you didn’t take it before I went bankrupt, so it is now part of the bankruptcy proceedings”.

So no rehypothecation or loaning, no “suing” by HSBC, no stealing or counterfeiting of the bars and certainly not the total destruction of bullion banking. Just another lesson in counterparty exposure and possession is nine tenths of the law.

How to Make Money in a 'Fugly' Stock Market: Bob Moriarty

By The Gold Report, on December 8th, 2011

Despite the “fugly” future that Bob Moriarty, founder of 321gold.com, talks about in this exclusive interview with The Gold Report, he’s downright bullish on the U.S. dollar for the time being. He says it’s not only a safe haven but “the best investment to be in for the last six months.” As for equities, Moriarty makes it clear that he takes no pleasure in watching a company lose 25% of its value in a week when there is nothing wrong with the company. At the same time, he’s alert to bargains. Any time you have the opportunity to buy cash at a discount, he advises, “throw money at it.”

The Gold Report: Since the last time we chatted in July, Bob, a lot has happened. Congress raised the debt ceiling, as you predicted.

Bob Moriarty: Right.

TGR:Then the Super Committee failed to produce an agreement so we can look forward to the automatic debt reduction of $2.2 trillion.

BM: The Super Committee was totally illegal and unconstitutional in the first place and it was totally ineffective. They couldn’t reduce spending by $1.5 trillion over a 10-year period. Give me a break.

TGR: Okay. Moving on. . .Unemployment remains at about 9%.

BM: You say 9%? I don’t think so. How about 23%?

TGR: The list goes on. Occupy Wall Street protests have sprouted up all over the country. And of course, Newt Gingrich is the leading Republican candidate.

BM: That anyone could even consider Newt Gingrich for anything above the role of dog catcher is pretty terrifying.

TGR: There’s more. We’ve seen riots in Europe, with the epicenter in Greece. We’ve got a weak German bond market.

BM: Weak? It was a total failure; 39% coverage is a disaster. Germany is the bedrock of the EU, and if they can get bids for only 39% of bonds it’s over—over—for the EU.

TGR: The Italian bonds coming up should test that theory.

BM: Italian bonds are paying 8% or something like that. It can’t do it. The Greek two-year bond is paying 160%. The one-year bond is paying 270%. Greece has defaulted. Italy, Spain and France are going to default. It will be a series of cascading bank defaults. Dexia Bank failed a month ago. The banking system is under water. I’ve been saying that for years. It’s true.

TGR: So looking at this whole developing picture, from the crisis in Europe to the U.S. debt debacle, from stubborn unemployment, protests and riots to the upcoming presidential election—what do you make of all of this?

BM: The piece I wrote in early October captured it. I said things were about to get “fugly” and it’s time to head for the bunker.

TGR: In your Nov. 11 article, you stated specifically that you’d climb out on a limb and suggest that 2012 will go down in history as the year of bank failures. How do you see that scenario playing out?

BM: Okay. Here’s what’s important to understand and very few people understand this. If you start off with $1 million and loan it from one institution to another to another to another, you may have a net of $1 million. But if somebody defaults and that $1 million asset disappears, you get cascading defaults of every institution that had that $1 million asset. It’s really simple. The Greek default—and Greece has defaulted even though they won’t admit it—will cause a default in Spain and Italy, and that’s going to cause a default in France and that’s going to cause a default in the U.S.

TGR: And what happens when they default?

BM: The banks close. What can we do? We have more debt in the world than assets, so we have to write off the bad debt. Unfortunately, no government in the world is talking about that. The only people talking about it are Gerald Celente, Kyle Bass and me.

TGR: But bank foreclosure is more than writing off bad debt. That creates catastrophic. . .

BM: It’s a good thing if a business fails, because that means somebody who is efficient comes along and picks up the slack. We do not need to reward failure in the banking system. We need to reward success.

TGR: Could the banking system write off a portion of the debt?

BM: Nah, they are under water now. It’s a zombie banking system and has been since about the middle of September 2008. Just a while ago, at the end of November, the Federal Reserve disclosed $13 billion in profits to the banks from the trillions in loans they made back in 2008 that they’ve been lying about ever since. They were bailing out Barclays, Royal Bank of Scotland and lots of other banks that had nothing to do with the United States.

TGR: Is there a banking system that will survive these cascading defaults?

BM: The question should be: “Can you have a banking system that is sound and secure?” And the answer is yes. The Canadian banks are in a lot better shape than the U.S. banks. A sound, secure bank cannot have those zombie assets, such as the mortgages that we know people are not paying off. Half the mortgages in the United States are under water, with 25% in default. Those mortgages must be written off.

TGR: Couldn’t a component of the banking system—some of the regional banks in the U.S., particularly those that have written off some of those mortgages and are really more about loaning to local businesses and local communities—survive a banking system failure?

BM: The banking system in the United States is a network of giants and the regional banks really don’t exist anymore. I don’t have specific numbers but I think the big five banks probably represent 90% of the banking system. That leaves no fallback, really.

TGR: When the U.S. banks close, you’re in the Cayman, but what happens to the rest of us?

BM: Since Bretton Woods in 1944, governments have been spending money they don’t have and it’s time to pay the piper. A lot of people’s “assets”—Social Security, pensions, Medicare, Medicaid—will evaporate. They’ll disappear. We need to go back to a real world economy where people produce things of value. We need reasonable taxes. And we need a reasonably sized government that doesn’t spend beyond its means. This is true of individuals as well as governments.

TGR: How do people waiting in line for pensions, Social Security, Medicaid, etc. . .

BM: That money has to come from somewhere. Anything the government gives one group has to be taken from another group. The net is it costs you money to have the government provide healthcare, Medicare, Social Security. We would be far better off if the government didn’t provide these things. We didn’t have Social Security 100 years ago and people were fine. When I started working 40 years ago, people still had pensions from their employers. By and large they don’t have much of that anymore.

TGR: Unless they’re government employees.

BM: Yeah. Then you are going to get paid twice what the private sector is getting paid.

TGR: Your November article also said what you have been suggesting for months that cash is the best investment people can hold. In fact, you concluded with these words: “It’s time to stay in cash and head for the bunker.” As you mentioned before, “times are about to get fugly.”

BM: Right.

TGR: Do you include cash equivalents such as gold or precious metals under that “cash” umbrella?

BM: No, I mean cash. The best investment to be in for the last six months was cash, U.S. dollar cash. Even Gerald Celente had a six-figure account with MF Global and the money simply evaporated. Without cash, people who go to bed wealthy will wake up poor.

TGR: All the goldbugs say that will happen if you keep your money in fiat currencies too.

BM: That’s not necessarily true. At times, investing in fiat currencies is a good deal. If you were investing in U.S. dollars in March 2008, you would have been better off that fall than you would with any other single investment. Gold went from about $1,200/ounce (oz) to $700/oz, while silver went from $21/oz to $9/oz. The stock market crashed. The gold juniors crashed. Sometimes being in cash, U.S. dollars, is a good investment. It’s been a particularly good investment for the last three or four months.

TGR: Because your analogy goes back to 2008, when we had a severe crash, is it fair to extrapolate that you’re predicting another severe crash?

BM: We are going through a crash right now.

TGR: If that’s the case, why should anyone be in equities?

BM: You can’t ever invest 100% in anything. No one can guarantee the future. All you can do is hope you get it right 55% of the time. Cash, U.S. dollar cash, has been a good investment since this past April, and it’s still a good investment. Europe is about to blow up and the dollar is a safe haven. There is a lot of deleveraging going on. And, as in 2008, the U.S. dollar is a good place to be. And cash is better than having the money in T-bonds, with a negative interest rate.

TGR: You are expecting the banking system to collapse, and banks typically hold cash. What value is the cash if the banks fold?

BM: You can buy things with it.

TGR: So you’re saying people should physically hold their cash in their homes?

BM: I do. I have some money in the banks to pay bills, but mentally I have written off every cent in the bank. I accept the fact that I will go down to the bank one day and the ATM won’t work anymore and the bank will be closed. You can have cash sitting in the bank, too, but at the same time you have to understand the great danger with the banks. While I wouldn’t sit on a half million dollars in cash at home, if I had it in a bank I would be prepared. I think everybody should keep three to six months in liquid assets, and that certainly would involve cash and gold and silver. Cash and gold and silver will be very valuable when the banking system collapses.

TGR: If the banking system collapses, how long will it be before new banks emerge to take over the fundamental role of banking?

BM: It’s not “if” the banking system collapses; “when” would be more accurate. You simply cannot justify the banking system today. The sooner we get to whatever comes next, the better off we’ll be. My opinion is that all fiat currencies will crash, and when they do, we’ll go back to a gold standard.

TGR: How quickly can we develop a gold standard from the annihilated banking system?

BM: It depends on how big the riots are. Governments never act. They only react. If we have riots in every major city in the United States and hundreds or thousands of people a day are being killed, the government may actually take some action that would make sense. That would be to say, “We have a financial system that doesn’t work. We need to go to a financial system that does work.” Gold and silver work and they have worked for 5,000 years.

TGR: Do you see a situation where the government would start a national bank?

BM: God, I hope not. That would be adding fuel to the fire. I think that “unlimited stupidity” and “government” belong in the same sentence. But if the government started a national bank, that wouldn’t be unlimited stupidity―that would be infinite stupidity.

TGR: Earlier you made a point about having to be right only 55% of the time to move forward with a balanced portfolio. Let’s assume that an investor has some hard assets now, in safe havens, with some at home. At that point, does this investor turn to the market?

BM: Yes. I just bought 100,000 shares of a company that did a financing at $0.80 in April. It now has $0.46 per share in cash and its stock is selling at $0.23. If I can buy cash at $0.50 on the dollar, I’ll do it.

TGR: So you are looking for opportunities with a company’s value below its cash balance.

BM: Any time you can buy at a discount, that’s a good deal. If you can buy a dollar for $0.50, the upside is $0.50. We see this happening every 10 or 15 years. In the summer of 2001, a number of stocks that were selling for less than the cash they had on hand doubled or tripled or quadrupled when the market turned around. In September and October of 2008, something like 200 companies were selling for less than their cash on hand. A Russian silver company was selling for $0.20 on the dollar. You simply cannot get a more favorable environment than buying cash at a discount. Any time you have that opportunity, you should throw money at it.

TGR: So, what companies are you finding that have cash at a discount?

BM: People are going to have to look for them themselves. All the figures are available to everybody. I use Stockhouse and StockWatch and look at the ratios.

TGR: We’re hearing that capital is so hard to come by, yet we found at the San Francisco Hard Assets Investment Conference at the end of last month quite a number who were getting capital.

BM: Those deals had actually been set up for months. The last few weeks the financings literally just stopped. Everybody is in a total panic now. I watched stocks drop 25% and I have to tell you, it was pretty scary even though I was one of the guys forecasting it. When a company loses 25% of its value in a week and there is nothing wrong with the company, it’s scary. A lot of times I see things happening that scare me and I don’t want them to happen. I talk about them because I have an obligation to talk about them.

TGR: Could you talk about the kinds of companies that are actually building their value?

BM: In August 2008 the Philadelphia Gold and Silver Index, which is a measure of pure psychology, went to the lowest level it had ever been in history. Stocks were cheaper in August, September and October 2008 relative to gold than they had ever been. But gold was $700/oz. Silver was $9/oz. And they got clobbered. So it’s natural that big gold and silver shares got clobbered too.

Now, we have $1,700/oz gold and $32/oz silver, and stocks are cheaper today than in 2008. That is totally irrational. Those kinds of circumstances do not continue for very long. In 2008 platinum came down to the same price as gold. Platinum is $210/oz cheaper than gold today and that has never before occurred in my lifetime. I don’t think it’s occurred in history. That’s an example of something that would be a very good opportunity.

TGR: So if the juniors are on sale, are the majors also on sale?

BM: Yes.

TGR: How should investors begin looking at the whole plethora of mining companies to decide which ones really create the value?

BM: My priority would be junior production stories. You’ve got Timmins Gold Corp. (TMM:TSX.V; TMM:NYSE.A), Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BLV), Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:Fkft), First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:Fkft; FRMSF:OTCQX), Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.A) and Rio Alto Mining Ltd. (RIO:TSX.V; RIO:BVL; RIOAF:OTCQX). There are dozens, dozens of good production stories. Nobody quite knows where the price of gold and silver will go, but anybody in production now is literally minting money. You would have to be profitable. You couldn’t possibly not be profitable.

TGR: You wrote about Meadow Bay Gold Corp. (MAY:TSX.V; MAYGF:OTCQX) back in October. Is that still an interesting story to you?

BM: It’s a really funny story. It totally screwed up its drill program. It was drilling for an epithermal vein system and hit a porphyry system. The significance of that is that porphyries are really big, so instead of having potentially 1–2 million ounces (Moz), literally overnight it went to having 3–4 Moz potential.

When I made that same comment about screwing up the drill program with Meadow Bay’s chief geologist, he laughed, because if you’re going to screw up by finding a much bigger deposit than you thought you had, that’s a really good deal.

TGR: You’d called it a no-lose drill program. Did you know it was going to come out the way it did?

BM: It had announced one hole—a porphyry hole. As soon as I knew it was porphyry I understood the future was bright indeed. That’s a really good company and it is doing a really good job.

TGR: Do you have a preference toward production of gold versus silver?

BM: Silver has attracted a lot of attention with people who simply don’t know what they are writing about. And they attract all the nutcases. You can make a lot more money shorting silver than you can going long silver because people get totally irrational. There is no shortage of silver. We are not about to run out of it. The ratio over 100 years has been 47:1—47 ounces of silver per ounce of gold. In a financial collapse, the ratio actually goes higher. I could see silver going to 100:1 before it goes 30:1. But, the primary factor in the price of anything is the cost of production. Silver costs $6–8/oz to produce, so $32/oz silver is pretty expensive.

TGR: So you would want to look at junior production companies that would still be profitable with silver at $10/oz?

BM: The silver companies would still be extraordinarily cheap even if silver went to $15/oz.

TGR: Do you have any other companies with no-lose drill programs or other nice surprises in store on your radar?

BM: Dozens of companies have done exceptionally well. I just came back from two weeks in Colombia, where virtually everything is a slam-dunk. Sunward Resources Ltd. (SWD:TSX.V) is going to be announcing really extraordinary results. It already has about 8.6 Moz. That’s an extraordinary amount of resources for a company only two years old.

TGR: If Sunward is still drilling, how big might that get?

BM: A lot bigger.

TGR: Double?

BM: Could be.

TGR: In what timeframe?

BM: Two years.

TGR: Any others you’d care to mention in Colombia?

BM: Colombia Crest Gold Corp. (CLB:TSX.V; EAT:Fkft), Red Eagle Mining Corp. (RD:TSX.V), B2Gold Corp. (BTO:TSX; BGLPF:OTCQX), Bellhaven Copper and Gold Inc. (BHV:TSX.V), Solvista Gold Corp. (SVV:TSX.V) and Continental Gold Ltd. (CNL:TSX). But, there are 36 listed companies in Columbia, and I don’t think you could go wrong investing there.

TGR: So Colombia as a region is a good play.

BM: It’s a phenomenal play.

TGR: You’re also big on Africa.

BM: I used to be, but Africa is getting really stupid. Tanzania’s come up with suggestions and changes to the mining laws. Ghana’s started getting greedy. In every business cycle when the cost of the commodities goes up countries start thinking, “You know, we hate to see these guys making all this money so we need to make sure it won’t happen.”

TGR: So Africa’s fallen out of favor.

BM: Australia, Peru and Argentina are also getting stupid.

TGR: Do you hold better hope for the U.S. on the mining front?

BM: The U.S. has some really wonderful properties in Arizona, Nevada, Idaho and Oregon. The western part of the country was wealthy due to mining and we are going to go back to that. I think the U.S. will split up into a series of five or six nation states. Florida has nothing in common with California and California has nothing in common with New York. But again, the U.S. as we know it might not exist a year from now.

Take a look at what I said a few years ago about riots in the United States. Occupy Wall Street started in September. It was a peaceful demonstration. There was no crime. There was no violence. The police started it by barricading young women behind the net and then spraying them in the face with pepper spray.

Occupy Wall Street hit a nerve in Americans and spread all over the country. When it got to Oakland, the police decided they needed to up the ante, so they started firing teargas grenades in the face of an Iraqi War veteran from 10 feet away. If I did that, I’d be in jail for attempted murder. Since a policeman did it, he got away with it. They beat another protester so severely with batons they put him in the hospital in critical condition with a damaged spleen. They have pepper-sprayed priests, 84-year-old women and pregnant women. And these are all peaceful protesters.

The key to understanding what is going on is the police continue to escalate the violence. The next thing will be something similar to Kent State, where they plant an agent provocateur who will fire a gun into the air and the police will take that as permission to start shooting protesters. When that happens, it will literally start a civil war—and it could happen any day.

TGR: That’s not like citizens of one state going against citizens of another state because they have fundamental differences.

BM: No, it would be a civil war of peaceful citizens against a violent, corrupt, out-of-control government. We have every bit of that now. The police are the ones doing the escalation, and sooner or later Americans will start defending themselves. If it had been my son or daughter who was shot in the face, I don’t know what my reaction would be. Those protestors all have parents and brothers and sisters and friends. I’m shocked at the willingness of police to escalate violence against people who are no threat to them at all. It could get really bloody really quickly.

TGR: Why do you think this is Occupy Wall Street and not Occupy Pennsylvania Avenue?

BM: The term should be AWA—Americans with an Attitude. I think that these protests are underway in 113 cities, so obviously a lot of Americans in a lot of locations are angry.

23% of Americans are angry because they’re unemployed.
46 million Americans are angry because they are on food stamps.
50% of mortgage holders are angry because their mortgages are under water.

Everyone knows they have been raped by Wall Street and the government. The common theme is anger. We are angry at big business and we are angry at government.

Big business owns government. You have to go after big business. Barack Obama and this administration are totally controlled by external forces. They are controlled by Israel, Wall Street and the media. But we do not have an activist government that’s actually doing anything. It’s totally corrupt, bought and paid for. Everyone in Congress, with the exception of Ron Paul, has turned into a pimp.

TGR: That’s why congressional approval is as low as what―18%?

BM: 7%. The devil does better than that. Someone did a survey a week or so ago comparing Congress to Satan and Satan came up with an 8% approval rate.

Convinced that gold and silver were at their bottoms, and wanting to give others a foundation for investing in resource stocks, Bob and Barb Moriarty brought 321gold.com to the Internet 10 years ago, and later added 321energy.com to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites feature articles, editorial opinions, pricing figures and updates on relevant current events. Before his Internet career, Moriarty was a Marine F-4B pilot and O-1C/G forward air controller with more than 820 missions in Vietnam. A captain at age 22, he was the youngest naval aviator in Vietnam and one of the war’s most highly decorated. He holds 14 international aviation records, and once flew an airplane through the Eiffel Tower’s pillars “just for fun.”

Harrisburg or Bust

By Christopher Briem, on November 16th, 2011

Remember this is all about the capital of the Commonwealth of Pennsylvania.

The latest on the financial soap opera otherwise known as Harrisburg.

The real endgame playing out as Moody’s withdraws its rating on certain Harrisburg water bonds.

Yet money or not, money has to be spent on Harrisburg’s water infrastructure.

Harrisburg may get what it asked for in the end.

Muniland News Tsunami

By Christopher Briem, on November 11th, 2011

The muniland news filters are being hit by a tsunami this afternoon:

Patriot/News: Harrisburg debt insurer rejects City Council proposal with city days away from state takeover

Bloomberg/WashPo: Jefferson County, Ala., wins initial bankruptcy hearing approval from court

Reuters: The Sharks Circling Harrisburg

Trib: Allegheny sewer project at estimated $6 billion

Bond Buyer: Jefferson County Finally Files for Bankruptcy

SF Examiner: Accounting rules hurt public pension reform

Guardian(UK): Fears grow over US pension crisis as Rhode Island’s debts are laid bare

and it flows with all that a bit. PG: Citing a lack of support, Onorato yanks proposed UPMC bond

Quick.. find all the other Hospital Authorities in Pennsylvania in this:

Why Not Default

By Simon Grey, on November 9th, 2011

Seriously, what’s so difficult about allowing student loans to be discharged in bankruptcy?

Today, President Obama is effectively giving college students and their parents his middle finger. Whereas Jobs’ prank was harmless and symbolic, the President’s plan to bail out student loans will derail the entrepreneurial dreams and financial security of countless young people. [Ed. - this claim is utter bulls**t.Bailing out student loans will increase their financial security because they will no longer be slaves to the banks. And, with less debt, they can actually become entrepreneurs.]

By executive order, the President’s unconstitutional “We Can’t Wait – Pay As You Earn” plan modifies the existing Income-Based Repayment Plan so that, effective in 2012, graduates may cap their loan payments at 10percent instead of 15 percent of their discretionary income. Anything remaining after 25 years (formerly 20 years) becomes fundamentally the taxpayers’ responsibility. And, if a student wants to become a public servant (i.e. work for George Soros) his loan will be forgiven after just 10 years.

Obviously, Obama is playing for political points with this plan, presumably to mollify the OWSers, so I understand outrage for that reason. But what I don’t understand is how anyone thinks that student loans weren’t already the taxpayers’ responsibility. The government guaranteed student loans a long time ago, which is one of the reasons there’s a college bubble—private lenders face virtually no risk on the loans. In fact, the government guarantee of repayment is why default was taken off the table as an option: the government didn’t want taxpayers to take it in the shorts.

Neo-con bomb-lobbing aside, Obama’s plan is pretty terrible. It shouldn’t wreck the economy(at least no more than seeding a college bubble would), and it’s better than a jubilee for the loans, but there is still a much better solution available: the federal government should stop guaranteeing student loans and allow them to be discharged in bankruptcy. This way, college student wannabes won’t be as inclined to pursue worthless degrees and banks won’t be as inclined to fund the pursuit of worthless degrees. You don’t need bailouts, you don’t need special debt laws, all you need is the ability to discharge student debt during bankruptcy. Problem solved.

To bankrupt or not to bankrupt

By Christopher Briem, on October 19th, 2011

The news is that Harrisburg has filed for bankruptcy. While technically true that they have filed for bankruptcy, this may be shot down before it all begins. The funniest part of this at the moment is that all the judges for this are in Tampa for a conference. So hold your breath.

Remember, bankruptcy has not been far below the horizon here in the past. The closest the city of Pittsburgh should have come to bankruptcy was in the early 1990’s just as Tom Murphy became mayor. Yet the history is that the City of Bridgeport, CT had just before that time tried to file bankruptcy but was denied by a federal court to even enter bankruptcy. Municipal (Chapter 9) bankruptcy is not like bankruptcy for you and me in lots of ways. US constitutional issues prevent a judge from exerting many of the powers over a state entity the same way might happen in recievership for an individual or company.

In Bridgeport’s case the court ruled that the city was not really broke enough to file for bankruptcy, i.e that it had the fiscal capacity to tax or borrow its way to meet its obligations. Unlike other bankruptcies which really look at assets and liabilities, Chapter 9 is more about cash and the fiscal capacity to raise cash. Most public assets are not going to be considered for sale or liquidation no matter, so there is no risk of the mayor’s chair being carted off to a flea market.

The thing is that while I believe the City of Pittsburgh was in a far worse shape than Bridgeport was at the time, that precedent was clearly the biggest thing on the mind of city lawyers who likely advised a bankruptcy filing would not go forward. I personally bet they were wrong on that and that Pittsburgh was not in as good shape as Bridgeport was and well over the line of insolvency in a public sense. There is even a school of thought that says if Bridgeport just waited another year before filing its fiscal condition would have been so bad that the court would have had no choice but to let the filing go forward.

Still I bet Bridgeport’s aborted bankruptcy is the only thing that kept the Murphy administration from filing for bankruptcy right as they took office when they were told the city was about to go cash zero. Prevented from bankruptcy all sorts of even worse things happened. The result was that over the subsequent decade city in succession ’sold’ or liquidated the water department into the water authority (long story there), the city’s debt ballooned, tax liens sold off to a third party without much concern for city of Pittsburgh development and no significant increase (Pension bonds were a wash I would say.. at best) in pension funding would leave us where we are today. So today we have more debt, more pension liability, no direct control of the water system (think of all the problems that has caused) and had much of a decade of neighborhood economic development arrested because it was held hostage by a wall street company that couldnt spell in Latin.

Then there is this logic people say the Commonwealth of Pennsylvania must ‘approve’ any bankruptcy filing. Also technically true in the legal sense. In the real world sense it is not so important. The lawyers might argue, but consider a few things. In Pennsylvania the state approval for letting a federal bankruptcy filing go forward is mostly embedded in the Act 47 law and process. There has been municipal bankruptcy in Pennsylvania, even one recently in the case of Westfall Township. Did Westfall get permmission to file for banktruptcy? I would argue it didn’t in that an Act 47 process only began after they filed and had a bankruptcy proceeding move forward. The state went along, but it was kind of after the fact. And in one of the stranger acts of jurisprudence.. some folks may remember the monster AHERF bankruptcy that still lives on in shaping the region’s state’s health care system. AHERF, even though it was not a municipality, was a Chapter 9 bankruptcy. Does not quite make sense to me, but I think it was just too big and too complex to really fit into a Chater 11.

In the bigger sense it does not matter if the state really approves a major bankruptcy or not. If bills go unpaid, or say bond payments don’t go out. Bad things happen and at some point someone would be forced to do something. The state would have little choice to ‘approve’ a bankruptcy, or a judge would find some way to rule that a filing could go forward.

Also unmentioned in the article is the story of Vallejo, California and its bankruptcy that is just about to come out of. That also is a case where I have argued the fundamental finances there are far better than they were (or are) here. Go figure and again think about all the victory signs last month when the state accepted the while pension accounting scheme. Is Vallejo a model for what may happen in Harrisburg? Probably not just yet.

So what happens now? My guess is that when the judges get back from Tampa and have a hearing on any of this they are likely to push back and say no… no filing for you. Sort of like the soup guy on Seinfeld. Federal judges are not going to want to get into what is, on top of everything else, a political circus in the city of Harrisburg. They will tell them they are not there to settle the city’s political problems, whether or not that is the verbiage of any actual ruling who knows. So a bankruptcy may happen… but I bet it is not right now.

Still, I am surprised the Commonwealth let this all get this far already. There are consequences across the state for such financial miasma in any one municipality, let alone in the state capital.

The Harrisburg Miasma = Pennsylvania's Miasma

By Christopher Briem, on October 17th, 2011

The thing that gets me about the fiscal mess in Harrisburg these days. The city is so broke it is seeking bankruptcy. Even if that does not go forward, why are they in this situation? Is the city itself that mismanaged? Even if you want to think so, the actual fiscal miasma they are dealing with is from a debt owed by something called the “Harrisburg Authority” for building of all things a garbage incinerator. The full story was written up by the Patriot News earlier in the year.

The real story here, IMHO, is not really about anything specific to Harrisburg, but what this all says about public governance in Pennsylvania. How many folks really paid attention to whatever public debate there was over the garbage incinerator that has created their current predicament? All the public authorities and special districts in Pennsylvania create an impossible to decipher mosiac of governance that leads to these problems. Pennsylvania is by far the most fragmented state in the nation when it comes to local governance. Most focus on municipalities when they think about that, but it goes far beyond boroughs and townships and cities… few people really think about the secondary costs of all the ‘other’ governments we have out there. Why is there a generic “Harrisburg Authority” in existence if not to obscure the public governance. There is even an Equipment Leasing Authority here in the City of Pittsburgh that is nominally an independent public authority according to the laws of Pennsylvania.

How bad is it? A version of a graphic I made in the past is below.. when you lay out all the official and distinct governments in Pennsylvania this is what you get. Each government is scaled by the number of employees it has. You never know what will jump up and bite you. Somewhere in there is the “Harrisburg Authority”. From obscurity to what is becoming national news and beyond.

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Greek Debt Crisis

By Doug Gentry, on October 12th, 2011

So, who cares about the Greek debt crisis? It’s a small country, a long ways away.

Answers:

Greece as a Country: “We care!”

The Euro currency countries: “We care!”

Europe Generally: “We care!”

U.S. and International Financial Community: “We care!”

Stock Investors: “We care!”

All right, already. Here’s why they care.

The background

Through a series of missteps over the last 10 years the Greece government amassed a large government (or sovereign) debt, and then disguised it from its citizens, lending institutions, its Euro partners, and international financial organizations. The recession exacerbated the problem, threatening to push the Greece government into bankruptcy. Annual deficits as a percent of GDP or total national debt as a percent of GDP are higher but not that different from the United States, but in contrast to the U.S. the global investment community has very little confidence in Greek bonds and the ability of the government to repay them. That means Greece has to pay much higher interest rates on its debt, if it can borrow money at all.

What Can Greece Do?

When faced with larger government deficits, policy makers typically turn to two economic “levers” – fiscal policy and monetary policy. On the fiscal side the government can cut spending and/or raise taxes. Both of these actions have met strong resistance in a country used to heavy subsidies of middle class citizens and notoriously poor tax collection records.

Monetary policy can be an effective tool – often because it does not require the approval of the legislature or the voters. Normally a central bank can inject funds into the economy (electronically “printing” money) and use that to pay debts. This injection of money can also lead to the devaluation of the local currency. While devaluing doesn’t sound appetizing it can be very effective, since it encourages more exports and more tax revenues, and because it makes it easier to pay off debts denominated in the local currency.

BUT, Greece can’t execute its own monetary policy. It is a member of the Eurozone – using the Euro as its currency rather than the drachma. As a result Greece cannot unilaterally change the supply of its currency. It does not have control over monetary policy. To make matters worse for Greece, the Euro has held a fairly high value against other world currencies – just opposite of the direction Greece needs to help with its problems.

Euro

How Does the Crisis Affect the Euro?

The Euro is a common currency, currently used by 22 European countries. Decisions on the supply of the Euro are made by a representative body at the European Central Bank.

When a member country, like Greece, threatens to default on its loans, global investors pull funds out of Greece and the Eurozone. This reduces the demand for euros, and causes the value of the euro to fall. This is a mixed blessing. Countries often prefer a strong currency, but a weaker one can encourage exports. Europe is an export driven continent.

Joining the Eurozone initially, countries have to prove that their economies and government budgets are healthy. It is like welcoming someone new onto a lifeboat. You prefer the new person to be healthy. It appears that Greece hid or obscured its economic reports when applying for membership and now its fellow lifeboat members are not happy.

Commentators, such as Paul Krugman, have argued that Greece should never have been allowed in the Eurozone. They also argue that the Euro common currency is flawed if monetary policy is directed centrally, but fiscal policy remains with individual countries. Macroeconomic theory suggests that both need to work in concert, and the slow, deliberative and political style of the European Central Bank is not well suited to crisis management. Here’s one of many Krugman posts on the crisis.

Why the Large Bailouts by European Governments?

Other European countries, particularly those who share the use of the euro currency, want to stabilize the currency in their own self-interest. In additional many of the large banks and financial institutions in Europe hold Greek debt. If Greece defaults on that debt, those institutions are in trouble. France and Germany have been two of the largest contributors. French voters have been relatively quiet about the bailout, but German politics are much more sensitive to the issue. Chancellor Merkel of Germany has to balance the need to preserve the Eurozone economy against the indignation of German taxpayers who feel little affection for Greece.

European policymakers also worry about other members of the Eurozone – including Spain and Ireland. These two countries have stressed economies for reasons different than Greece. Neither of them had profligate government spending, but both have been hit particularly hard by the recession. Additional stresses on Europe could tip these countries further into trouble.

Why the International Community and Stock Investors Worry

The source of concern in the stock markets and among international investors is mostly fear of default. Large financial institutions and other holders of Greek debt would be seriously hurt. If a Greek default pushed other European countries like Spain and Ireland over, the impact grows significantly.

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Life after default

By Christopher Briem, on August 10th, 2011

No… I don’t do macro. More micro defaults:

The city of Vallejo California is exiting out of chapter 9 bankruptcy soon, all while Jefferson County, Alabama plays hardball with its bondholders in its bankruptcy.

As I pointed out in the past, by comparable metrics of debt per household, Pittsburgh is so far past where Vallejo was as it entered bankruptcy.. and that was before any of the latest developments were factored in.

Gift Card Advice as Borders Closes the Book on Business

By Andrea Woroch, on July 25th, 2011

In the wake of Borders recent announcement it’s folding up shop, those holding gift cards from the bookstore chain may have cause for concern. While the second-largest bookseller says it’s presently honoring gift cards, shoppers are well advised to use up their
balances before it’s too late. We faced a similar situation when Blockbuster and Circuit City filed for bankruptcy and are likely to do
so again. To ensure consumers don’t get left in the lurch, here are a five lessons we’ve learned from these experiences.

1. MOVE FAST
Store liquidations usually begin rapidly — this past Friday for Borders — so it’s often best to use up gift cards online, rather than wait
until you have time to visit a retail store. Borders liquidation website says all 399 remaining stores will close by September, but
they may start writing the final chapter on your local store much earlier.

2. RESEARCH THE BANKRUPTCY STATUS
Borders was refused bankruptcy, meaning they had no choice but to liquidate. Other retailers, however, filed for bankruptcy and turned things around. Sometimes a company that’s filed for Chapter 11 is allowed by the bankruptcy court to honor its gift cards. California, however, specifically requires merchants in bankruptcy compensate gift card holders.

3. CONSIDER THE COMPANY’S STABILITY
If you hear tales of other merchants threatening to close shop, research their financial stability via such sites as BBB.com and Forbes Risk List. (Stores considered at-risk by Forbes presently include Rite Aid and Zales.) Also, ScripSmart.com regularly updates
its list of “Gift Cards to Avoid.”

4. USE IT OR SELL IT
If you’ve received a gift card for a merchant you wouldn’t frequent, don’t wait until a store goes out of business. You can exchange gift
cards for cash right now on such sites as GiftCardGranny.com and receive up to 95 percent of the card’s value in cash.

5. USE A CREDIT CARD
If you’re concerned about a retailer’s financial stability but still want to buy a gift card, do so using a credit instead of a debit card.
You can then ask the card issuer to withhold payment until you’re sure of the merchant’s status.