Bonds, Lame Bonds

<p>Unprecedented failure in municipal bond auctions is causing municipal borrowers to flee the auction market and driving up rates at which cities can borrow money.</p>
February 23, 2008, 11am PST | Michael Dudley
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"California, Florida schools and the owner of John F. Kennedy International Airport joined a growing list of municipal borrowers exiting the U.S. auction-rate bond market as record failures push taxpayer costs higher."

"Thousands of auctions run by banks to set rates on the debt failed this month as investors shunned the securities and bankers refused to submit bids, sending interest costs to 10 percent or higher on some bonds. Auctions covering as much as $26 billion of bonds a day failed to attract enough buyers since Feb. 13, according to Bank of America Corp."

"Rates in the more than $300 billion auction market, where local governments, hospitals, museums, student-loan agencies and closed-end mutual funds borrow, are determined through a bidding process every seven, 28 or 35 days. Auctions fail when there aren't enough buyers. That's left bondholders who wanted to sell stuck with the securities and taxpayers or other backers of the debt such as fund holders with higher interest costs."

"Yesterday's 641 auctions of publicly offered bonds resulted in 395 failures, or 62 percent, according to data compiled by Bloomberg...Just 44 failures were recorded between 1984, when the market was created, and the end of last year."

"California, the biggest municipal borrower, plans to replace $1.25 billion of auction-rate bonds, debt manager Paul Rosenstiel said this week. New York City's Municipal Water Finance Authority yesterday said it will pay off auction debt by selling $684 million of variable-rate demand notes on March 18."

"Regulators are calling for more disclosure in the wake of the failures. The Municipal Securities Rulemaking Board, which makes rules for dealers in the municipal bond market, is considering rules that would force dealers to reveal the number of bidders and disclose how often auctions fail."

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Published on Friday, February 22, 2008 in
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