California lifts IOU sale to $5 billion and sets final yields
Another rush of investor orders today allowed California to boost its sale of short-term notes to $5 billion, ending the cash emergency that threatened to send the state to Uncle Sam for a loan.
Treasurer Bill Lockyer said institutional investors placed $2 billion in orders for the IOUs, on top of the $3.92 billion in orders received Tuesday and Wednesday from individual investors.
The offering, initially for $4 billion, was expanded to $5 billion because of demand. Individual investors will have all of their orders filled; institutions will get the rest.
The state set the annualized tax-free interest rates on the notes at 3.75% for the seven-month issue (maturing next May 20) and 4.25% for the eight-month issue (maturing June 22).
Those yields matched the preliminary numbers Lockyer gave on Wednesday, although on Tuesday the state had estimated that the yields could be as high as 4% on the seven-month note and 4.5% on the eight-month issue, depending on investors' response.
Even at the low end of the state's original range the yields are juicy, because the interest is exempt from state and federal income tax. A 3.75% tax-free yield is equivalent to earning a fully taxable yield of 5.74% for someone in the 34.7% combined state and federal tax bracket.
California typically sells short-term IOUs each year at this time to patch its seasonal budget shortfall. But the credit crisis has caused many investors to abandon the municipal debt market, raising fears that the state couldn't get the cash it needed. Gov. Arnold Schwarzenegger warned on Oct. 3 that the state might have to go to the federal government for a loan.
Investors ought to be happy with the final yields. But from taxpayers' point of view, the state paid a high price to get the deal done. Massachusetts last week paid a yield of just 2.2% on similar short-term notes, although its offering was much smaller.
Photo: Treasurer Bill Lockyer
The engine that has been the strength of our economy has been real estate; this for the last 5 years. And now that this engine is completely broken, what will replace it? The U.S has no strength, only debt. More, if the rest of the world looks at us as scam artists that have hidden secrets now known to all; how do we as a capitalist country sell ourselves abroad. How many more private investment scams will be revealed as this economy pulls down the curtain. And once transparency laws are in full force, the revealing and finger pointing may send every investor running for cover. Burnie Madoff may not be the only crook at the top. What's more, I find it interesting that out of every nation, the greediest scams began in the USA. Sad, sad, sad. It wasn't enough that we embarrassed ourselves in Iraq about weapons of mass destruction; now we must face the deceit of our economy, as well. Who will want to invest in the U.S., probably those looking for a scam. I could be wrong about all of this. I mean, the dollar is up and Europe isn't doing that great, either. All I can say is that CNN and Fox news have the world watching. We are glued to the news all day in our home. . . the entertainment centered on those wealthy who are losing millions and those whose retirement funds have disappeared. Who needs a sitcom when we can now watch in person the next great depression as it approaches: something not possible in the the 30's.
Written by Paul Watrous
Posted by: Paul Watrous | January 17, 2009 at 11:59 AM