Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
Can a State qualify for TARP assistance; would its financial collapse threaten to create a “systemic risk”?
For the municipal bond market, the answer to the latter question is probably yes. The situation in the Golden State bears an uncanny resemblance to AIG last fall: financial mismanagement; floundering leadership; profligate spending and risk-taking with it’s balance sheet; excessive leverage. And, perhaps most importantly, no good tools available to the Federal government for an orderly restructuring of its affairs.
FDIC receivership is of course out of the question as the State is not a bank. And under our bankruptcy laws, municipalities can file for bankruptcy, but not states. Nor does the new legislation making its way through Congress to provide a framework for winding up the affairs of financial holding companies like Lehman and AIG and Citigroup will apparently not apply to states, either. GM and Chrysler can get their contracts reshaped in Chapter 11 to preserve their “wasting assets” and keep their workforces alive as going concerns, but not California.
What’s a Governator to do? Perhaps by cutting expenses wherever he can by declaring a state of “disaster” and going over the legislatures heads. Perhaps by trying to substitute Federal stimuklus money for currently budgeted California’s own budgeted expenditures.
But the guess here is that, just when you thought that TARP was being shunted at least to the recycle bin by the post-”Stress Test” rush by the systemic risk banks to raise capital “on their own”, along comes yet another systemic risk petition, this time from Sacramento. Maybe not today or tomorrow, but July 4? — then we’ll know what it cost to prop GM and Chrysler to their next lives post-bankruptcy, and a few banks may have even met the terms for repaying the TARP. But California, like it or not, will then be the next systemic shoe to drop on Washington’s table.
We are not likely to see an analogy to the famous New York Daily News headline in the mid-70′s “Ford to NYC — Drop Dead” — but we may well see similar intervention to what eventually occurred in New York by way of the State government– a sort of ad hoc receivership of California’s government in exchange for a Federal Aid package — like a domestic IMF loan. What a comeuppance for the world’s seventh-largest economy. But if it could get disciplined about its finances, what an engine of change it could once again be for the country. This could be a TARP loan worth the effort.
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