The More Things Change . . .

When a Snake Oiler Meets Venality

We have seen this before! In the early noughties a troop of investment banking marketers descended upon New Zealand and Australia, flogging structured finance instruments. Some wore pinstripe suits, spoke in plummy accents and hailed out of London. Others wore braces, loud ties, and hailed out of New York. They were selling "collateralised debt obligations" (don't you just love the euphemistic jargon), parcelled up into various risk tranches, each with respective credit-ratings and various statistical models assuring us that the risks of default were exceedingly low. And all this was being wrapped into managed funds, so that retail investors, the proverbial mums and dads, could get a slice of the heady action. And they did--in their thousands.

One had the distinct impression that it was the last gasp hurrah of a glorious party. Go out and flog this stuff one last time. Go to the end of the world, to the antipodes, to the colonies, where the gullible still reside. Sell and run. And they did and did. Now, when it all collapsed, shrieks were heard, blaming rotten and corrupt America for letting this happen.

But now it is a case of "fool me once, shame on you; fool me twice, shame on me". Bloomberg has reported that Illinois, that bastion of fiscal rectitude, has been struggling to find US citizens, pension funds, and institutions to buy its debt and fund its profligate entitlement, featherbedding, pay-off, deficit spending. So, guess what? The braces and loud ties have been dusted off again, and off shore the bond salesmen have trooped. A seven-country road show, with lights, bells, whistles, and back-slapping.

And, lo and behold, the stupid punters are once again stumping up their money. Lending to the most corrupt political establishment in the US! Why? Who would be so stupid?

The seven-country visit worked. The state sold one-fifth of the federally subsidized securities abroad the next month, tapping investors who are the fastest-growing source of borrowed cash for U.S. municipalities. Illinois, with the lowest credit rating of any state from Moody’s Investors Service, dangled yields higher than Mexico, which defaulted on debt in 1982, and Portugal, which costs more to insure against missed payments.

“U.S. states are among the cheapest sovereign credits in the world,” said Patrick Brett, a Citigroup banker who marketed the Illinois securities overseas. “You’re actually picking up a good amount of spread for arguably better credits relative to equivalently rated corporates and sovereigns.”

Don't you just love that language from Mr Brett of Citigroup: "arguably better credits relative to equivalently rated corporates and sovereigns . . ." This is a euphemism for "spin, spin, spin". If Illinois credit was sound, US investors would have picked it up. Because there is a real smell about state and local body deficits in the US--the smell of desperation--the locals know the risks and know that Illinois is the most intractably wretched, they fear the worst, and avoid them.

But, those greedy gullible overseas investors just cannot resist loud ties and braces. And we ask, who is the more culpable? Is it the dissembling snake oiler from Citigroup? Or is the greedy, smart-timing investor. But we are sure of this: when it all blows up, everyone will be unanimous that there is only one culpable entity in the dock--the big, evil investment banker. And those throwing the biggest, sharpest stones will be the oh-so-easily gulled investors who foolishly lent money to the most corrupt political establishment in the US, but whose venality willed them into a suspension of disbelief and prudence at the time.