Hot sectors in a tepid recovery
The energy, finance, technology and healthcare industries are expected to be the hottest areas for dealmaking in 2010. Full Article | Full Coverage
UPDATE 1-California says Fed must fix short-term muni market
(Adds details from Lockyer statement, background)
NEW YORK, Nov 21 (Reuters) - California's treasurer called on the Federal Reserve on Friday to solve the liquidity crunch that has made it much harder for public borrowers to sell short-term debt, forcing them to pay higher interest rates.
"These problems are burdening taxpayers with substantial costs, worsening state and local governments' budget woes, further destabilizing our banking and financial system, and hindering financing of infrastructure projects needed to help put us on the road to economic recovery," California Treasurer Bill Lockyer said in a statement.
Lockyer blamed the situation on bond insurers, saying their faulty subprime-linked investments was what cost them the top "AAA" ratings investors demand.
Liquidity has frozen because bond insurers cannot keep it "well-oiled," the treasurer said. Banks that took fees to serve as liquidity providers are now obliged to buy back muni variable rate debt but have little free cash to do so.
California's treasurer, joined by 19 other major public borrowers in his state, recommended two ways the Federal Reserve could solve the problem.
The U.S. central bank could buy short-term variable rate muni paper if other investors cannot be found. That would free banks from having to serve as liquidity providers, which is akin to the buyer of last resort.
Alternatively, the Fed could loan cash to banks so that they can purchase the debt more easily.
Lockyer called on the Fed for help just one day after California was forced to reduce a $523 million bond sale by half because institutions balked at buying the paper. For more details, please click on: [nN20291297].
This is not the first time California has turned to the federal government. The state has one of the nation's highest home foreclosure rates and worst budget problems.
In October, Gov. Arnold Schwarzenegger told U.S. Treasury Secretary Henry Paulson that his state might need the federal government to help California sell $7 billion of short-term debt.
That did not prove necessary after Congress approved the $700 billion bank rescue plan, which helped thaw capital markets and allowed the sale to go through.
California state residents bought an unusually high percentage of that debt.
