How "-izations" work out

by: Hopeful

Sat Feb 24, 2007 at 12:54:09 PM EST

Bloomberg has a fascinating article on a financial disaster for New Jersey consumers. This one was called "securitization," not "monetization." But I think the lesson is that these consultants, banks, and Wall Street firms are quite happy to set up deals with the state that enrich themselves. If they don't benefit ordinary citizens, too bad. While I'll mention the details below, look at this conclusion about the loss of $201 million by PSE&G:

The full loss wasn't disclosed at the time. The prospectus for the bond sale said that $125 million of the proceeds went toward financing costs, which included underwriting fees, legal expenses and about half of the charge on the swaps. The rest is still being paid by consumers.

Hopeful :: How "-izations" work out

What happened is that the PSE&G utility made a complicated deal with Lehman Brothers to reduce interest rate risk:

While borrowers routinely use swaps to reduce risks, this one was unusual because it was a win-win situation for PSE&G shareholders. The electric company would get paid by New York- based Lehman if interest rates rose and made its borrowing costs too expensive. PSE&G's customers, not its investors, would foot the bill if interest rates declined.

Naturally it did not work out too well for one party in this deal, as usually happens if you allow someone else to make a profit by risking your assets. Consumers are still paying a special fee, and still owe $77 million. Here are the responses from those responsible:

The (then) president of the utilities board, who approved the deal: "``We relied on the advice and expertise of Bear Stearns, our financial adviser,'' said Tate."

Ah, so we we can ask Bear Stearns:

J. David Rush, senior managing director at Bear Stearns and adviser to the New Jersey regulators, declined to comment.

Well, what about Lehman Brothers?

Amany Attia, a Lehman banker who worked on the deal for the fourth- largest U.S. securities firm by market value, didn't return a telephone call seeking comment.

Meanwhile, the New Jersey politicians didn't even notice what was going on.

This is why I think selling off a Turnpike to pay off debt in a complicated financial transaction that we don't understand is not a good idea. I suspect it were such a good deal for New Jersey, the investors would just buy bonds from the state instead. But then no one would be able to raise tolls, get commissions, get fees, spend state money to get re-elected, etc., etc. And economists would not even say they're doing anything wrong: They're just acting in their self-interest.

Tags: PSE&G, Lehman Brothers, Asset Monetization, securitization, Wall Street, utilities, Bear Stearns, (All Tags)

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How "-izations" work out | 1 comments

On Corzine and -izations (4.00 / 1)

The Governor has had a pretty good week with the budget, so I want to give him some slack. But I do wonder whether his continued emphasis on moneterization, rather than a reform of state government, is because at heart, he is a finance man, and not a manager. In other words, he doesn't know how to fix state government. He just knows how to sell off assets to raise money.

This assessment is a bit harsh, but as a state worker, I wonder why the only sense in which the Governor talks about reforming the government is in terms of layoffs. He did it again in his budget speech. A wise manager would know that there are many opportunities to reform the system to make it better functioning and more streamlined without layoffs. Al Gore managed to do this for a part of the Federal Government, so the possibilities are there. The Governor just doesn't seem to have the interest in it.

He does seem interested in selling state assets however. Cars, lotteries, turnpikes, ...

-pb

by: princetonblue @ Sun Feb 25, 2007 at 20:46:10 PM UTC