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Category: Municipal bonds

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CDR Financial Products founder pleads guilty in municipal bond case

A Beverly Hills financial firm and its founder pleaded guilty to federal criminal charges that they defrauded government agencies by steering investment contracts to firms that paid them kickbacks.

David Rubin, 50, and his company, CDR Financial Products Inc., were accused of running sham auctions for government agencies looking to invest money raised through municipal bond offerings. The contracts were awarded to favored firms that secretly paid kickbacks to CDR, not always the firm offering the highest returns, the government alleged.

Rubin, who sobbed at Friday’s plea hearing in New York, is scheduled to be sentenced April 27. He had unsuccessfully requested a delay in his trial to be with his wife, who is dying of cancer, Bloomberg News reported.

Two former CDR executives are scheduled to stand trial on similar charges next week in federal court in Manhattan.

Rubin developed a niche helping local, county and state agencies invest money raised from bond issues for such things as school or road construction.

Because government agencies typically don't need to use the money immediately, they often hire companies such as CDR to arrange short-term and longer-term deals to invest the funds.

The indictment alleged that CDR engaged in a pay-to-play scheme in which investment companies secretly paid CDR kickbacks to win government contracts. The alleged scheme cost the government agencies money because the contracts did not always go to investment providers offering the best return, the indictment said.

Rubin is the 10th person to plead guilty in an ongoing federal investigation of the municipal bond industry, the Justice Department said in a news release.

Federal prosecutors had amassed almost 800,000 tape recordings and 125 million pages of documents during a three-year investigation of CDR, defense lawyers said earlier this year, according to Bloomberg News.

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-- Stuart Pfeifer 

Municipal bonds thrive after predictions of disaster

It's reckoning time for Meredith Whitney. 6a00d8341c630a53ef01543883c9ab970c-600wi

A year ago, the star financial analyst -- who shot to fame when she predicted the 2008 financial crisis -- set off a stampede when she said that investors in municipal bonds were headed for trouble. Budget problems in cities and states, she told "60 Minutes," would lead to "50 to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."

The time frame she gave: "It'll be something to worry about within the next 12 months."

Her prediction was scoffed at by municipal experts, who noted that Whitney had little expertise in municipal finances, but the call still led investors to pile out of municipal bonds, terrifying municipalities.

Now that Whitney's 12 months are up, it is not surprising that analysts are holding Whitney to account with more than a hint of schadenfreude.

There were indeed two big defaults -- Harrisburg, Pa., and Jefferson County, Miss. -- but after that the list falls off. A few of the headlines that greeted the anniversary: Meredith Whitney Still Dead Wrong on Munis, Happy First Birthday, Terrible Meredith Whitney Call and Not Only Was Meredith Wrong....

Bloomberg has noted that investors who ignored Whitney's call could have made millions investing in municipal bonds, which turned out to be one of the year's best investments.

Whitney has been quiet in these anniversary events, but in the middle of the year she argued on CNBC that while the defaults might not happen this year, it is only a matter of time.

"I can't believe I'm the only person talking about it," she said.

But John Moussea, a municipal analyst at Cumberland Advisors, wrote in a note to clients this week that municipal finances have actually improved over the last year, making more defaults less likely:

State governments recently finished the seventh consecutive quarter of rising tax receipts. This followed five straight quarters of declines from the fall of 2008 through the end of 2009. To be sure, many states and cities are still struggling to rein in rising pension costs, as well as dealing with the loss of federal dollars. But many states have made deep cuts in expenses and, in most cases, budget gaps have been closed without reliance on one-time solutions.

Rather than gloating, Moussea closes on a note of holiday cheer, saying that municipal bonds have "made the long trip back from the despair of a year ago. And for that we are thankful."

RELATED:

Whitney stays grim on muni bond outlook

Investors pour into Treasury and muni bonds for safety

'Conduit' bonds: Default rate of 'conduit' municipal bonds raising concerns

-- Nathaniel Popper

twitter.com/nathanielpopper

Photo: Meredith Whitney. Credit: Louis Lanzano / Bloomberg

 

 

Wells Fargo settles bid-rigging case

WFCstagecoachLAmuseumhandout

Wells Fargo & Co. has agreed to pay at least $37 million to settle accusations that it and Wachovia Corp., which Wells acquired in 2008, paid kickbacks to win business from municipal governments.

In its regular quarterly filing with the Securities and Exchange Commission, made Tuesday, the San Francisco bank said it would pay the greater of the $37 million or "65% of the restitution amount of a future settlement, if any, with the various state attorneys general of their investigation of Wachovia."

The agreement, which Wells said was reached Oct. 21, stems from litigation with various municipal governments around the country and consolidated in a federal lawsuit in Manhattan.

The suit accused many investment banks of conspiring to rig the bidding process, “sharing their illegal gains through kickbacks to one another, and making other secret, undisclosed arrangements.”

A Wells spokeswoman said the case mainly involved events at Wachovia that occurred before Wells took over the Charlotte, N.C., bank.

Bank of America, JPMorgan Chase and UBS previously agreed to much larger settlements in the case.

RELATED:

JPMorgan Chase to settle bid-rigging allegations for $211 million

Bank of America settles municipal bid-rigging accusations

UBS to pay $160 million to settle bid-rigging case

-- E. Scott Reckard

Photo: A Wells Fargo stagecoach in the bank's history museum in L.A. Source: Wells Fargo & Co.

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California housing agency forcing foreclosures

The California Housing Finance Agency is foreclosing on clients even though they are making their monthly payments, a state Senate watchdog group said
A state agency that provides low-interest mortgages is foreclosing on a small number of clients even though they are making their monthly payments, a state Senate watchdog group reported.

The California Housing Finance Agency is foreclosing on homes because their financially strapped owners temporarily rent them out and move into cheaper rental properties, the Senate Office of Oversight and Outcomes said Monday.

The agency, which finances the mortgages through the sale of tax-free bonds, allows borrowers to rent their homes only if they suffer a severe economic hardship, such as losing a job.

That tight restriction was recommended to the agency by its bond counsel prior to the collapse of the state's housing market and the deep recession of 2007-09.

About 350 Housing Finance Agency borrowers rented their homes without permission and 21, so far, have been foreclosed on. Another 186 are being threatened with foreclosure despite staying current on their monthly loan payments, the oversight office said.

According to the report, the agency said it didn't know how many borrowers were denied permission to rent.

The agency did not respond to requests for further comment.

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Home loan program to get easier under revised U.S. program 

New FHA certification rules hamper condo sales, refinancing

A health crisis follows mortgage foreclosure crisis

-- Marc Lifsher

Photo: A "for sale" sign on a foreclosed Glendale house in September. Credit: Kevork Djansezian / Getty Images

California boosts yields on muni bond sale to lure investors

Calflag
California was forced to boost interest rates on a sale of $1.8 billion in tax-free muni bonds Wednesday, as institutional investors demanded higher yields to close the deal.

The state set a yield of 3.70% on the 10-year bonds in the offering, up from a preliminary estimate of 3.51% on Monday. The five-year bonds in the sale will pay a yield of 2.28%, up from an initial estimate of 2.10%. The bonds were sold in maturities of three to 30 years, with the longest-term issue yielding 5.03%.

Interest on the bonds is exempt from state and federal income taxes for California residents. The proceeds from the sale will fund voter-approved infrastructure projects.

Treasurer Bill Lockyer had to pay higher yields after the bonds got a lukewarm reception from individual investors Monday and Tuesday. Those investors put in orders for $387 million of the debt, or about 21.5% of the total.

By contrast, individual investors ordered almost 28% of the $2.37-billion bond offering the state sold Sept. 20. And at the sale before that, in November, individuals sought nearly 80% of the deal -- when yields were substantially higher. The 10-year bonds in that offering paid 4.23%.

The relatively low demand from individuals this time around meant that institutional investors, such as mutual funds, had more leverage to push for higher returns when the state took their orders Wednesday. That will benefit individuals who ordered the bonds Monday and Tuesday, because all buyers get the same final yields.

It also means taxpayers will foot a bigger bill for interest costs than Lockyer had hoped.

Some muni bond market analysts say individual investors balked at the offering because they’re unhappy with the relatively low interest rates on tax-free bonds in general, even though yields have risen over the last few weeks.

“Retail investors are deeply ambivalent about bonds at these yields,” said Matt Fabian, an analyst at research firm Municipal Market Advisors in Concord, Mass.

Interest rates on high-quality bonds have dropped across the board this year as the Federal Reserve has tried to put more downward pressure on all rates to help the economy.

The tax exemption on muni bonds means their returns are more attractive than yields on many taxable securities. A five-year U.S. T-note pays just 1.04%, and that interest is federally taxable.

Still, many investors are put off by the low nominal returns on munis compared with what they remember in recent years, said Marilyn Cohen, head of money management firm Envision Capital Management in Los Angeles.

“Given the market we confronted, we’re satisfied with the results,” said Tom Dresslar, a spokesman for Lockyer in Sacramento. “We’re confident we got the best deal possible for taxpayers.”

Besides the $1.8 billion in tax-free bonds, the state also sold $205 million in shorter-term taxable bonds Wednesday.

RELATED:

California plans $2-billion bond sale amid rising yields

California sells out $5.4-billion short-term note sale

California sells $2.4 billion in bonds as yields fall

Investing: Is the bond market at a crossroads?

-- Tom Petruno

Follow me on Twitter: Twitter.com/tpetruno

Photo credit: Makaristos

Individual investors' orders stay light in California bond sale

Californiaflag
Demand from individual investors remained on the light side Tuesday as California wrapped up the second day of a large bond offering to fund infrastructure projects.

Treasurer Bill Lockyer said the state’s brokerage network took in an additional $137 million in orders from individuals for the offering of $1.8 billion in tax-free muni bonds. On Monday the state got $250 million in orders. The two-day total of $387 million was about 21.5% of the total deal.

That was significantly less than the $655 million that individual investors ordered at the state’s last bond offering, on Sept. 20. That total was almost 28% of the $2.37-billion deal.

Lockyer got a better response to an offering of $200 million in shorter-term taxable bonds Tuesday. Individual investors ordered about 43% of those issues.

The state will complete the bond sale Wednesday, when institutional investors such as mutual funds will bid for the remaining securities and final yields on the bonds will be set.

The tax-free bonds -- the interest paid is exempt from state and federal income tax for California residents -- got a lukewarm reception from individual investors even though the state was offering higher interest rates than at the September sale.

As bond yields in general have rebounded over the last month, the state was offering a preliminary yield of 2.10% on the five-year bonds in its latest sale, up from 1.61% in the September deal. The 10-year bonds in this sale were offered at a preliminary yield of 3.51%, up from 3.17% at the last sale.

The bonds, known as general obligation issues, are being sold in maturities of three to 30 years. The tax exemption means the yields on the bonds can be worth substantially more than similar fully taxable yields, depending on an investor’s tax bracket.

California always prefers to get substantial orders from individual investors in debt deals. That lessens the chance that institutional investors will be able to use their clout to demand higher yields when they bid for whatever’s left. (Individual investors get whatever the final yields turn out to be.)

Some muni bond market analysts say individual investors are unhappy with the relatively low interest rates on tax-free bonds, even though yields have risen over the last few weeks.

"Given overall market conditions we're satisfied with the outcome," said Tom Dresslar, a spokesman for Lockyer in Sacramento.

Proceeds from the securities will finance a backlog of voter-approved infrastructure projects.

This week’s sale will be California’s last general-obligation bond offering of 2011.

RELATED:

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California sells $2.4 billion in bonds as yields fall

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-- Tom Petruno

Follow me on Twitter: Twitter.com/tpetruno

 

California bond sale draws relatively light demand on first day

Individual investors on Monday placed orders for about 14% of a $1.8-billion sale of tax-free bonds by California, a relatively low turnout for a state debt sale.

Treasurer Bill Lockyer said the state’s brokerage network took in $250 million in orders on the first day of a two-day retail sale period, when the state gives preference to individuals over institutions.

By contrast, Lockyer had $459 million in orders on the first day of last month’s bond sale. That was about 18% of the total offering of $2.5 billion in securities.

The state took in a lower level of orders this time around despite offering significantly higher interest rates on the bonds than at last month’s sale, which was the first offering of 2011.

CaliforniaflagAs bond yields in general have rebounded over the last month, the state was offering a preliminary yield of 2.10% on the five-year bonds in its latest sale, up from 1.61% in the September deal.

The 10-year bonds in the latest sale were offered at a preliminary yield of 3.51%, up from 3.17% at the last sale.

The bonds, known as general obligation issues, are being sold in maturities of three to 30 years.  Interest on the securities is exempt from state and federal income tax for California residents, so the returns can be worth substantially more than similar fully taxable yields, depending on an investor’s tax bracket.

 “We’ve got another day to go. Let’s see where we’re at when it’s all over,” said Tom Dresslar, a spokesman for Lockyer, when asked about Monday’s order level.

California has the lowest credit rating of any state, reflecting the weak economy and the state’s history of budget struggles, but that has been the case for years. The bonds are rated A1 by Moody’s Investors Service and A- by Standard & Poor’s. Those ratings are considered “upper medium grade.”

Proceeds from the bonds will finance a backlog of voter-approved infrastructure projects.

Individual investors can submit orders for the bonds through Tuesday. Orders must be placed with brokers; the state doesn’t sell its bonds directly to investors.

Institutional investors will bid for the remaining bonds on Wednesday, which is when the final yields will be set. Individual investors who don’t like the final yields can cancel their orders.

The bonds are sold in minimum blocks of $5,000. For more information on the sale, go to Lockyer’s website, buycaliforniabonds.

RELATED:

California plans $2-billion bond sale amid rising yields

California sells out $5.4-billion short-term note sale

California sells $2.4 billion in bonds as yields fall

Investing: Is the bond market at a crossroads?

-- Tom Petruno

Follow me on Twitter: Twitter.com/tpetruno

California launches $1.8-billion muni bond offering

Californiaflag
California on Monday offered tax-free yields as high as 4.87% on long-term general obligation bonds, hoping to attract substantial demand from individual investors.

The state is trying to raise $1.8 billion in the bond sale, its second offering in less than a month. The proceeds will be used to finance a backlog of voter-approved infrastructure projects.

Treasurer Bill Lockyer set preliminary yields on the bonds at levels above what the state paid in the last sale -- reflecting the rebound in market interest rates in recent weeks as U.S. economic data have pointed to slow growth but not recession. Higher yields are good for investors but more costly for taxpayers.

The bonds are being sold in maturities of three to 30 years. The state is offering 2.10% on the five-year bonds, up from 1.61% in the September deal. Ten-year bonds are offered at 3.51%, up from 3.17% at the last sale; the 30-year issue is offered at 4.87%, up from 4.80%.

The interest on the bonds is exempt from state and federal income tax for California residents, so the returns can be worth substantially more than similar fully taxable yields, depending on an investor’s tax bracket.

California still has the lowest credit rating of any state, reflecting the weak economy and the state’s history of budget struggles. The bonds are rated A1 by Moody’s Investors Service and A- by Standard & Poor’s. Those ratings are considered “upper medium grade.”

Individual investors can submit orders for the bonds Monday and Tuesday. Orders must be placed with brokers; the state doesn’t sell its bonds directly to investors.

Institutional investors will bid for the remaining bonds on Wednesday, which is when the final yields will be set. Individual investors who don’t like the final yields have the option of canceling their orders.

The bonds are sold in minimum blocks of $5,000. For more information on the sale, go to Lockyer’s website, buycaliforniabonds.

RELATED:

California plans $2-billion bond sale amid rising yields

California sells out $5.4-billion short-term note sale

California sells $2.4 billion in bonds as yields fall

Investing: Is the bond market at a crossroads?

-- Tom Petruno

Follow me on Twitter: Twitter.com/tpetruno

California plans $2-billion bond sale amid rising yields

Californiaflag
California will sell $2 billion in bonds next week, and the state probably will have to pay significantly more to borrow than it did three weeks ago.

That may lure more yield-hungry individual investors to the securities.

Treasurer Bill Lockyer plans to offer $1.8 billion in tax-free bonds and $200 million in taxable issues to raise cash for voter-approved infrastructure projects. The general obligation bonds typically are sold in maturities ranging from one year to 30 years.

The state borrowed $2.4 billion via bonds on Sept. 20, its first sale of 2011. That turned out to be near the recent low point for muni bond yields, which had been falling for much of this year in tandem with the decline in yields on other types of bonds, including U.S. Treasury issues.

But the rush into Treasury bonds as a haven has ebbed since mid-September, as worries about Europe’s debt crisis have eased somewhat and as U.S. economic data have pointed to slow growth but not recession.

The result: Treasury bond yields have rebounded, pulling other interest rates up as well.

California sold five-year bonds at a tax-free yield of 1.61% in the Sept. 20 sale. Now the market yield on five-year California debt is about 2.08%, said Joe Lee, a muni trader at De La Rosa & Co. in Los Angeles. Ten-year California bonds are yielding around 3.5%, up from 3.17% at the Sept. 20 sale.

Continue reading »

California sells $2.4 billion of bonds amid falling yields

Californiaflag
California on Tuesday wrapped up its first long-term debt sale of 2011, paying interest rates substantially below what it paid on bonds last November -- a savings for taxpayers.

The drop in yields curbed demand for the bonds from individual investors, but buying by institutional investors such as mutual funds allowed Treasurer Bill Lockyer to issue nearly the full amount planned.

The state said it sold $2.37 billion of tax-free general obligation bonds to refinance previously issued bonds and pay off other debt.

Individual investors put in orders for $655 million of the bonds on Friday and Monday. Institutions bought $1.74 billion of the deal on Tuesday.

When it issued bonds in November the state paid an annualized tax-free yield of 4.23% on 10-year securities in that offering. This time Lockyer set the yield on 10-year bonds at 3.17%, more than a full point less. Yields were lower across the board on bonds of other maturities as well.

Lockyer Although California’s credit rating remains the lowest of any state, the budget passed by the Legislature in June has given investors more comfort about the state’s fiscal outlook, Lockyer spokesman Tom Dresslar said. “We believe the budget has helped constrain the price” of borrowing, he said.

Credit rating firm Standard & Poor's in early July raised its outlook for the state’s rating to “stable” from “negative,” saying the state's plan to balance its budget was "largely realistic."

It also has helped California that muni bond interest rates in general have tumbled this year, along with yields on U.S. Treasury bonds, as the economy has weakened and many investors have favored bonds over stocks for safety. The 10-year Treasury note yield was at 1.94% on Tuesday, down from 3.30% at the start of the year.

But falling yields have pushed some individual investors to the sidelines because they believe the returns aren’t high enough to justify the risk, analysts say. Small investors are “deeply unhappy” with muni yields now, said Matt Fabian, analyst at research firm Municipal Market Advisors.

Orders from individual investors in Tuesday’s California bond sale were well below the nearly $1 billion they put in for the November sale, although this time around bonds of certain maturities were available only to institutions. The state said it raised yields on bonds maturing between 2013-2016 and 2022-2028 by as much as 0.05 percentage points from its initial estimates to get the deal done.

With the steep drop in muni yields this year “the market is not very conducive to doing a bang-up retail business,” Dresslar said. Still, he said, the state was “very pleased” with the demand it saw.

The state plans another general obligation bond sale in mid-October, although the amount hasn’t been determined, Dresslar said.

Some investors may be shying away from muni bonds because of President Obama’s proposal to limit the amount of muni bond interest that high-earners can exclude from their taxable income beginning in 2013. The proposal would help pay for the economic-stimulus program in the jobs bill Obama sent to Congress earlier this month.

But Congress could quash the idea. Lockyer and other state officials already have raised objections, warning that the move could mean investors would demand higher yields on muni bonds, driving up state and local governments' cost of issuing debt.

RELATED:

California sells out $5.4-billion short-term note sale

Muni bond market was a big winner as stocks dived

Fed expected to launch new program to push long-term interest rates lower

-- Tom Petruno

Inset photo: Treasurer Bill Lockyer. Credit: Armando Arorizo/Bloomberg News

California muni bond deal sees light demand from individual investors

Calflag
A steep drop in interest rates on tax-free municipal bonds this year has curbed individual investors’ appetite for a new California debt offering.

The state’s brokerage network took in orders Friday and Monday for $640 million of a $2.5-billion general obligation bond deal offered by Treasurer Bill Lockyer, his office said late Monday.

By contrast, individual investors put in orders for nearly $1 billion of bonds at the last such offering, in November.

The difference between then and now: Market yields on California muni bonds have fallen sharply, pulled down by the slide in U.S. Treasury bond interest rates this year and by the relative calm in the muni market after a major sell-off last fall and winter fueled a spike in yields.

When it issued bonds in November the state paid an annualized tax-free yield of 4.23% on 10-year securities in the offering. This time around the state set the preliminary yield on its 10-year bonds at 3.17%, more than a full percentage point less.

The state is offering 4.80% on the 30-year bonds in this week’s deal, down from 5.50% on 30-year bonds it sold in November.

The decline in rates is good news for taxpayers who will foot the bill for the bonds, which will refinance previously issued debt. But individual investors “are very wary of these yields being so low,” said Joe Lee, a muni trader at bond firm De La Rosa & Co. in L.A.

Because of its protracted budget woes, California has the lowest bond ratings of any state, at A1 from Moody’s Investors Service (tied for last place with Illinois) and A- from Standard & Poor’s.

The relatively light demand from individual investors means the state is more dependent on institutional investors, such as mutual funds, to buy the bonds. Those investors will put in orders on Tuesday, which is when final yields on the securities will be set.

Some investors may be shying away from muni bonds because of President Obama’s proposal to limit the amount of muni bond interest that high-earners can exclude from their taxable income beginning in 2013. The proposal would help pay for the economic-stimulus program in the jobs bill Obama sent to Congress earlier this month.

It’s not at all certain that Congress will agree to limit the muni tax exemption. Lockyer and other state officials already have raised objections, warning that the move could mean investors would demand higher yields on muni bonds, driving up state and local governments' cost of issuing debt.

RELATED:

California sells out $5.4-billion short-term note sale

Muni bond market was a big winner as stocks dived

Fed expected to launch new program to push long-term interest rates lower

-- Tom Petruno

Photo credit: Makaristos

 

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