Bank of America Corp., owner of themost-active subprime lender, Countrywide Financial Corp., earned$2.9 million in interest and fees for a line of credit Arizonaused through June to balance a budget undermined by the housing-market collapse.
Morgan Stanley, fined $102 million by Massachusetts lastmonth for allegedly breaking home-lending laws, shared in$579,000 of fees from helping run a $120 million bond sale forthe state last week that pushed debt payments from this fiscalyear into future budgets. Wachovia Bank NA and Bank of Americamanaged $400 million of Chicago transportation note sales in2009 and 2010 to cover delayed state funds even thoughWachovia’s parent Wells Fargo & Co. and Countrywide have beensued by Illinois for steering minority borrowers to subprimeloans.
New Jersey, New Hampshire and other U.S. states also neededbudget-balancing help that enriched the same Wall Street firmsthat touched off the longest economic slump since the 1930s bypackaging loans to unqualified borrowers. States issued $92billion of long-term debt since Jan. 1, 2009, generating about$488 million for banks based on the average underwriting fee of$5.30 per $1,000 of bonds, data compiled by Bloomberg show.
“You’re basically rewarding those who got you into themess,” Arizona’s Treasurer Dean Martin said in an interview.
Martin’s state, with the nation’s second-highest home-foreclosure rate after Nevada, paid Wells Fargo, Morgan Stanley,Goldman Sachs Group Inc. and other firms involved in subprime-mortgage trading more than $5 million to help raise $1.4 billionto balance its budget by selling state offices, prisons andfuture state lottery revenue, bond-sale documents show.
How to ‘Stick It’
“Everyone’s saying they want to stick it to Wall Street,”Martin, 35, said from Phoenix. “If you want to stick it to WallStreet, balance your budget.”
Banks helped states add $43 billion of debt last year, themost since 2004, Moody’s Investors Service said in May, as theycoped with what the U.S. Census Bureau says was a $95 billiondecline in tax collections from September 2008 to the end of2009. Cost cuts are needed, too: budget deficits will reach $140billion in fiscal 2011, which began July 1 for most states, theCenter on Budget and Policy Priorities, a Washington-basedresearcher, said in June.
States have little choice but to use prominent Wall Streetfirms to market their debt because only the biggest banks havethe resources to support such large deals, said John Sinsheimer,Illinois’s capital-markets director.
“To put together a group of small banks would be anunmanageable task,” Sinsheimer said by telephone from Chicago.Illinois paid Bank of America’s Merrill Lynch & Co. $754,000when it sold $1.3 billion of short-term notes July 20 to make upfor a decline in tax revenue. “We pay for services rendered andwe’re getting services rendered,” he said.
Underwriting debt isn’t the only way banks profit fromstates battered by a decline in tax revenue last year that wasthe steepest on record, according to the Nelson A. RockefellerInstitute of Government in Albany. At least 12, including NewJersey, New Hampshire and Ohio, are hiring investment banks todevise ways to use borrowing to finance or put off millions ofdollars of interest payments they can’t afford in their 2010 or2011 budgets.
New Jersey paid Morgan Stanley $143,000 to sell $94 millionof four-month notes July 12 to cover bond payments due July 15and Aug. 1, according to testimony from the Office of PublicFinance meeting at which the deal was approved. The notes willbe refinanced in September in a $268 million deal that willdefer for about a decade $202 million of payments due this year.The maneuvers will generate $1.2 million in fees, said a June 29transaction summary Morgan Stanley prepared for lawmakers.
New Jersey earlier this year paid Merrill Lynch and othersmore than $3.5 million in a refinancing of $703 million of bondsthat shifted $679 million of debt payments due through 2014 intothe future. New Hampshire paid $119,000 to UBS FinancialServices Inc., a unit of Zurich-based UBS AG, for a $45 milliondeal that saved $48 million for this year’s state budget bypushing current interest payments into the next nine years,according to bond documents.
“Debt restructuring, in the form of issuing bonds to deferdebt service, became a common solution” to budget gaps in 2009,Moody’s said in its report on state borrowing.
Budget-survival tactics that benefit banks extend beyondthe state level.
In New Jersey, 56 school districts issued $183 million inshort-term notes after the state withheld aid payments due June8 and June 22, said Richard Vespucci, a spokesman for the stateDepartment of Education.
University Borrowing
Illinois public universities were given authority by theLegislature to issue debt to make up for missed state paymentsand Chicago’s Regional Transportation Authority, the second-largest U.S. public transport system, has borrowed $400 millionsince last year to cover delayed aid. New Hampshire this monthused a $25 million advance from its state university, which willbe repaid with borrowed funds, to help plug a budget gap.
Suggesting that New Hampshire’s deals will reward firmsthat caused the state’s budget problems is “simplistic,” NewHampshire Treasurer Catherine Provencher said by telephone fromConcord. “The issues are much more complicated and interwovento make a direct connection,” she said on July 12.
New Jersey Treasurer Andrew Eristoff said the Wall Streetbankers states work with are distinct from the banking segmentsthat were involved in mortgage finance.
“It’s a huge company we’re talking about,” he said July12 after the $94 million Morgan Stanley-led debt restructuringwas approved.
Millions in Settlements
Massachusetts Attorney General Martha Coakley finedinvestment banks including Morgan Stanley and Goldman Sachs forfunding brokers lending to homeowners who couldn’t afford theirmortgages, a violation of state law. Since 2008, she’s won morethan $440 million of settlements, according to news releasesfrom her office.
Morgan Stanley was among four co-senior managers of a $120million Massachusetts debt-restructuring last week and Goldmanwas part of the 21-firm selling group, bond records show. Bothfirms admitted no wrongdoing in their settlements with Coakley.
Coakley wouldn’t discuss the state’s continued use of thefirms, according to her spokeswoman, Amie Breton. Michael DuVally, a Goldman Sachs spokesman in New York, and Jennifer Sala of Morgan Stanley declined to comment.
In Illinois, Attorney General Lisa Madigan has sued WellsFargo and Countrywide, the two largest U.S. mortgage lendersbefore the housing market collapsed in 2007, for improperlysteering minority homeowners into subprime loans. The banks’actions led to a surge in foreclosures projected to reduceIllinois property values by $126 billion by 2012, Madigan’scomplaint against Wells Fargo says.
“Plummeting property values mean a shrinking tax base forfunds to support governmental services,” the July 31, 2009,complaint against San Francisco-based Wells Fargo says.
Wachovia Bank, which Wells Fargo acquired in January 2009,was senior manager of a $260 million short-term bond sale inJune 2009 by the Chicago Regional Transportation Authority. Theagency was seeking to cover state payments delayed as part of abudget-balancing strategy. Bank of America’s Merrill Lynchserved as lead underwriter on a new $140 million deal on July 19to help the same agency manage delays in state aid.
Through a spokeswoman, Robyn Ziegler, Madigan declined tocomment. So did Ferris Morrison, a spokeswoman for Wachovia, ina July 19 telephone interview. Bill Halldin, a Bank of Americaspokesman in San Francisco, said his firm gives states goodvalue.
“Our credit solutions are all priced competitively basedon current market dynamics,” he said in a telephone interviewJuly 21.
Arizona’s Martin, a Republican who ended his run forgovernor July 10, said as long as states don’t cut spending tomatch reduced tax revenue, Wall Street will be waiting to helpthem borrow.
“The state is doing exactly the same thing a lot ofsubprime homeowners did,” he said. “You’ve got a crisis thatwas caused by too much debt, and states are resorting to exactlythe same thing.”
To contact the reporter on this story:Dunstan McNichol in Trenton, New Jersey, at dmcnichol@bloomberg.net
Banks Charge States Millions in Debt Binge to Fix Subprime Bust