Editor’s note: Welcome to the formal launch of Opening Bell, a critical review of the morning’s business news written by Ryan Chittum. Youthful yet wizened and crusty, Ryan is a native of Oklahoma, where he is known as the “Oracle of Tulsa.” The Opening Bell is the latest editorial offering from The Audit, the business-press section of the Columbia Journalism Review.
And now: Ding, ding, ding—ba-wooong!”:
The business press goes wide today with its coverage of the latest corner of finance to suffer a meltdown. The market for so-called auction-rate securities has seized up in recent weeks, leading to nasty consequences for public borrowers like the Port Authority of New York and New Jersey and presenting another potential source of tens of billions of dollars in losses. It’s another consequence of the collapse of faith in the so-called monoline bond insurers.
Auction-rate securities are long-term debt vehicles whose interest rates are reset frequently (the WSJ says every week to thirty five days) at auction, which makes them similar to short-term bonds. These had been considered stable investments because the debt was issued by government entities or institutions like museums and hospitals. But in the last week or so the market has frozen, in part on fears that bond insurers will be downgraded, which would in turn downgrade the bonds they insure.
That has left many of the bonds worth much less than they were just weeks ago and is increasing the cost of financing for such stable entities as the Port Authority, whose interest payments on its auction-rate securities quadrupled Tuesday, according to Bloomberg News.
“It’s the beginning of the end for the auction-rate market,” said Matt Fabian, a senior analyst with Concord, Massachusetts-based Municipal Market Advisors. “Banks have stopped supporting the market.”
It’s about to get worse. Bloomberg reports that the second-biggest issuer of auction-rate securities, UBS AG (which this morning posted a record $11.3 billion loss in the fourth quarter on bad subprime mortgages), told its brokers yesterday it would not step in to buy those that don’t sell. Bloomberg also cites a report that 80 percent of the securities up for auction on Wednesday didn’t sell.
This comes at a time when governments are already strapped for cash, with real-estate taxes falling and the economy downshifting. The new crunch is making it harder for students to borrow, and could lead to a crisis in education funding in the fall. The banks that arrange the financing can’t step in to smooth out the bumps because their balance sheets have taken too many hits already and most are trying to preserve their capital, says the Financial Times, which describes the market as suffering an “implosion.”
The WSJ leads its front page with news that a Chinese plant makes the active ingredient in a blood thinner called heparin that’s under investigation in the sickening of hundreds of people, at least four of whom have died. The NYT puts it inside, on page 2 of its business section, leading us to conclude that Rupert Murdoch isn’t forcing the Journal to kowtow to the Chinese just yet.
If the Chinese facility is to blame (and both the Journal and the Times are careful to say no one knows if it is), it would be the latest major blow to Chinese manufacturing after months of bad press about its defective (and sometimes poisonous) products. Both papers report that the Food and Drug Administration had never inspected the Chinese plant where the pig-intestine-derived drug’s active ingredient was made for Baxter International, which is not unusual. The FDA has inspected just 7% of overseas drug-making plants.
The WSJ reports, though the NYT does not, that the FDA was supposed to inspect the Chinese plant before it allowed it to make the drug, but due to “human error, and inadequate information technology systems, a pre-approval inspection, which would normally be conducted, was not.”