Mish's Global Economic Trend Analysis

Caught on Video: Police Smash Woman's Phone as She Tapes Crime Scene; How to Stop "I am Above the Law" Mentality
Yield on Chicago School Bond Offering Hits 5.63%; Debate Over Risk; Miracles Not Coming; Bankruptcy the Sensible Option
Euribor Goes Negative, Banks Paid to Borrow from Each Other; ECB Risks Freezing Repo Market

Caught on Video: Police Smash Woman's Phone as She Tapes Crime Scene; How to Stop "I am Above the Law" Mentality

Posted: 21 Apr 2015 07:42 PM PDT

In yet another cops are above the law incident Watch U.S. Marshal Crush Camera.

Nosy neighbors caught a video of a law enforcement officer in California snatching a bystander's phone and smashing it after U.S. Marshals realized she was recording their bust of a biker gang meeting. The 53-second video, taken from across the street, shows a gun-toting marshal grabbing the woman's phone out of her hand, throwing it to the ground, and finally kicking it. According to a spokesperson for the marshals, the video "is being reviewed."

How to Stop "I am Above the Law" Mentality

The only way to stop this kind of "above the law" mentality is to immediately suspend, without pay, any police officer guilty of such behavior. A second offense is grounds for dismissal. As an added incentive, fired officers should lose 100% of all accrued benefits.

And in this case, repayment for the phone should come directly out of the suspended officer's paycheck (at say a 500% of damages rate).

I am open to negotiation on the terms mentioned above. But the terms must be severe enough to cause an immediate attitude change.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot

Yield on Chicago School Bond Offering Hits 5.63%; Debate Over Risk; Miracles Not Coming; Bankruptcy the Sensible Option

Posted: 21 Apr 2015 11:25 AM PDT

Today a $295.7 million bond offering by the beleaguered Chicago Board of Education hit the market.

The Yield Hit 5.63%. That is 285 basis points higher than Municipal Market Data's benchmark triple-A scale.

Debate Over Risk

Municipal Market Analytics (MMA) says Despite it All, Chicago Schools' Default Risk is Low.

Peel away the layers of negative headlines and patient investors will find low default risks and underlying credit strength in this week's $300 million Chicago Board of Education deal, according to Municipal Market Analytics.

"BOE debt is well insulated from default risk by significant 'belt and suspenders' protections," MMA wrote in a market piece authored by Matt Posner & Kevin McGuigan Friday. "We understand that negative headlines, downgrades and Chapter 9 speculation have all damaged value but believe the case can be made for a considerable underlying credit strength that exists for patient investors."

The bonds' value has been hurt by a stinging series of negative headlines, from multi-notch bond rating downgrades to Gov. Bruce Rauner's comments that no state bailout looms and bankruptcy is an option.

"Regardless of statements by the governor, Chapter 9 is likely a low probability outcome, allowing for a less cynical reading of CPS' otherwise strong pledged security," MMA wrote Monday in its weekly outlook authored by Matt Fabian, Lisa Washburn, and Bob Donahue.

"This security presents only minimal payment default risk," Monday's outlook piece said.

Debate Over Risk

I strongly disagree the MMA's assessment. While it's true that municipal bankruptcies are rare, the odds of this deal working out well are poor.

The only saving grace at the moment is that Illinois does not allow municipal bankruptcies.

And Rauner pledged "The taxpayers of Illinois are not going to bail out the city of Chicago, that ain't happenin. But there are things we can do to help them restructure and get their government and their schools turned around, and I'd like to help them.".

Simple Facts

The Chicago Public School System has a $1.1 billion budget bole in a $5.9 billion budget
The 2015 budget kited two months of property taxes from the fiscal 2016 budget
A $228 to $263 million derivative time bomb just triggered on the Chicago Board of Education
Chicago Public Schools may be out of cash in 30 days
Corruption investigations plague the school board
The school district faces a pension payment in 2016 of about $700 million.

No State Rescue

Where is the school district going to get $1.1 billion? Where is it going to get a $700 million pension payment?

The state? Think again.

Illinois Budget Deficit is $9 billion

Don't expect the state of Illinois to come to the rescue!

Crain's Chicago Business says Illinois' Budget Deficit is Twice as Bad as You Think.

Illinois' fiscal woes are significantly deeper and more serious than generally realized, with the state facing a $9 billion operating deficit in the fiscal year that begins July 1.

That's the horrific bottom line of a report released late today by researchers at the University of Illinois Institute of Government and Public Affairs, a study that may raise the eyebrows even of Gov. Bruce Rauner, who has been warning of huge financial problems ahead.

The conclusion: The actual deficit is about twice what is commonly reported, with the hole in the current fiscal 2015 budget not $2 billion to $3 billion but $6 billion, and rising to a projected $9 billion in fiscal 2016 and hitting $14 billion by fiscal 2026, assuming no changes in law or spending practices.

No Miracles Coming

How is a state that is $9 billion in the hole going to bail out a single school district that is $1.1 billion in the hole?

The obvious answer is that it won't and can't. There are no miracles to be had. The Chicago Public School system is bankrupt. All it will take to trigger bankruptcy is for the legislature to allow just that.

Bankruptcy the Only Sensible Option

Since downstate voters will not want to bail out Chicago, we may easily be approaching the point the Illinois legislature realizes it has no choice other than to allow municipalities the option of declaring bankruptcy.

This won't come easily for the legislature, but it's the right thing to do. Upstate vs. downstate politics may be enough to tip the tide.

Right Idea

Rauner has the right idea on taxes, on bankruptcy, and on a bailout of Chicago.

Not a penny of taxpayer money should go to fund a lost cause. I find it hard to believe that Emanuel himself does not know the school system is truly bankrupt.

When you are bankrupt, the only sensible thing to do is admit it.

That said, the law does mandate that parties in a chapter 9 bankruptcy dispute attempt to negotiate a settlement. Bankruptcy law must be adhered to. Realistically speaking however, history shows that unions will not concede benefits as they believe them to be sacrosanct, even though court decisions prove otherwise. Detroit made a huge mistake time-wise attempting to forestall the inevitable. Rauner needs to give an out of court settlement a chance, but for the sake of Chicago and Illinois, that chance should be of limited duration.

For more details on the miserable state of affairs of the Chicago Public School System, please see Credit Swap Event Triggers for Chicago Schools: Out of Cash in 30 Days, Cooking the Books to Oblivion.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot

Euribor Goes Negative, Banks Paid to Borrow from Each Other; ECB Risks Freezing Repo Market

Posted: 21 Apr 2015 09:04 AM PDT

Banks Paid to Borrow From Each Other

Via massive QE purchases of bonds, ECB president Mario Draghi is flooding Europe with cash that European banks don't want and cannot use.

One curious result of unwarranted QE is a negative interbank lending rate: Banks Paid to Borrow as Three-Month Euribor Drops Below Zero.

Banks in the euro area can now get paid to look after each others' cash for three months as the European Central Bank's bond-buying program floods the region's money markets with excess liquidity.

The euro interbank offered rate, or Euribor, for that time period dropped to minus 0.001 percent on Tuesday, according to data from the European Money Markets Institute. That's the first negative reading since Bloomberg started collecting the data at the end of 1998. The index represents the average rate at which the region's banks say they see each other lending in euros for three months.

Money-market rates have declined after several moves by the ECB. In June it introduced a negative deposit rate, meaning that commercial lenders were required to pay a fee to park their excess cash overnight with the Frankfurt-based institution. The ECB lowered the rate to minus 0.2 percent in September. Then in March this year the central bank started buying government bonds under a 1.1 trillion euro ($1.2 trillion) quantitative-easing program aimed at boosting growth and staving off deflation.

"Excess liquidity keeps flowing into the system week by week because of the QE program," said Nikolaos Panigirtzoglou, a strategist at JPMorgan Chase & Co. in London. "Banks find themselves inundated with deposits but they don't want to pay the ECB for parking their money there. Instead they'd rather lend the cash in the interbank market."

"It's good news for borrowers, not so good news for lenders," O'Hagan, Paris-based head of European rates strategy at the French bank. "Mr. Draghi wants us to spend the cash, not keeping it in Euribor. The purpose of QE is to get us to take on some risk."

ECB Risks Freezing Repo Market

An ICMA official says ECB Risks Freezing Repo Market.

The European Central Bank (ECB) risks secured-lending or repo markets grinding to a halt unless it works more closely with national central banks (NCBs) to improve liquidity, a senior trade association official told Reuters.

Godfried de Vidts, the chair of the International Capital Market Association's European Repo Committee, said unless the ECB took action within the next few months, investors might start avoiding euro zone bonds.

"Investors could become reluctant to invest in euro zone debt," he said, noting that his committee had voiced its concerns to officials at the ECB. "We are scared about the market freezing," de Vidts said.

In recent weeks, one 10-year Bund became so scarce that market players paid up to 2.5 percent to lend cash in exchange for the German bond, dealers said.

De Vidts said the ECB's "securities lending" framework also relies too heavily on NCBs offering their own lending programs, and many of them have not yet put systems in place.

NCBs are responsible for 80 percent of purchases under QE, with the ECB directly buying the remaining 20 percent in the roughly 7-trillion-euro euro zone government bond market.

"We are driving without headlights in the dark," said de Vidts, proposing that the ECB centralizes the scheme in Frankfurt.

"You are getting this scenario - which is a nightmare for the repo market – of a re-nationalization of a market that had developed to become European."

Last week, ECB President Mario Draghi said the bank saw no evidence QE was creating a shortage of bonds, or that this might happen in the future.

Come Hell or Frozen Water, Program Will Continue

De Vidts believes excess liquidity might cause a freeze. On April 15, Mario Draghi made the claim "Stimulus is Working".

"European Central Bank President Mario Draghi said the bank's stimulus efforts are beginning to take hold in the European economy and batted away concerns in financial markets that the bank may have to end its more than €1 trillion ($1.1 trillion) asset purchase program early."

If it's working, why wouldn't Draghi welcome ending the program early? Of course if it blows up in his face with unintended consequences, he may be forced to end it early.

Either way, Draghi has put himself into a box that says he will continue his plan come hell or frozen water.

The market may have something to say about that, perhaps sooner rather than later.

Stunning Arrogance

The arrogance of central bankers in spite of the fact they recently brought the world to the edge of financial collapse is stunning. Now they have created equity and junk bond bubbles of massive proportion and don't even see it.

The program must continue. Why? Because we said so. All in the foolish belief they need to stop consumer prices from falling.

Even the BIS recognizes the foolishness of the idea that falling consumer prices are damaging. For discussion, please see Historical Perspective on CPI Deflations: How Damaging are They?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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