Push for TARP Money to be Used for Muni-Bonds

As far back as January the House had voted on using TARP money for muni-bonds and its another example of the convergence that occurred between the Democrats and various actors of the in the muni-bond market. The devastation of the muni-bond market such on local communities such as in Jefferson County Alabama is threatening to lead to some of the greatest municipal bankruptcies in history. Of course many of these deals were corrupt and scandalous and put together by CDR Financial products and elected Democrats, but have no fear a bailout may be on the way!

California is asking that money from the Treasury’s TARP, the Troubled Asset Relief Program, be used to help back more than $13 billion in short-term borrowings. Members of Congress and several municipalities want bailout money to be used to cover more than $1 billion in losses from investments by municipalities in debt issued by Lehman Brothers, the investment bank that went bust.

And Representative Barney Frank, chairman of the House Financial Services Committee, is drafting legislation that would have the Federal Reserve, and potentially the Treasury’s bailout money as well, stand behind floating-rate municipal bonds — a $400 billion market that provides short-term financing to municipalities, but which has been largely frozen in the current credit crisis.

Another measure drafted by Mr. Frank, Democrat of Massachusetts, would create a public finance office within the Treasury Department to reinsure $50 billion in municipal bonds. This proposal comes as downgrades of municipal bond insurance companies have made it more difficult and costly for state and local governments to issue bonds.

So we have the remarkable spectacle of all of these muni-bond deals going sour, the Banks, AIG, and the democrats making out like bandits, and now the Democrats on a Federal level using our taxpayer dollars to rescue their fellows on a state and local level. In addition we have various state and localities who simply got burnt by bad investments such those who owned now worthless Lehman debt. They to are clamoring for help. As of now Geithener and Frank have been somewhat cool to the idea, but they are looking at it. And how bad has it gotten for the muni-bond market:

Clearly, market conditions are not favorable in several corners of the municipal bond market, which consists of more than 50,000 public entities that have issued about $2.7 trillion in debt.

In April, Moody’s Investors Service issued its first-ever blanket report on municipalities and assigned a negative outlook on the creditworthiness of all local governments in the United States. This suggests that Moody’s may downgrade the ratings of many municipal issuers, which would increase their borrowing costs.

2.7 trillion in paper, how much of that is based on real bonds and how much of that is phantom bonds? The Economist had noted about the troubles in April and the downgrade was bound to have negative consequences.