The bailout Congress is considering has nothing to do with municipal or government financing. This bailout is focused primarily to extensive leveraging in the housing market with under-collateralized loans and sub-prime mortgages.
Sub-prime mortgages are those that were initially closed with lower than prime rates but have passed the lower initial two- to three-year fixed lower interest rates and now jumped to rates millions now cannot afford.
At the time borrowers were closing sub-prime rate mortgages, they did not plan for the future and neither did many lenders on the mainland that were issuing these loans without planning for the later interest rate increase. These loans should have never been made. Borrowers started buying homes and other goods mortgaged by their homes at lower interest rates but when the interest rate later increased, these borrowers could no longer afford the monthly loan payments.
Regardless of how we may each feel about the results, the judicial process resulted in binding court orders requiring that the Guam COLA class be paid and the Earned Income Tax Credit be paid. Individual and corporate tax refunds that remain unpaid are legal debts that accumulate penalties daily and will cost taxpayers more over time compared to securing bond financing now.
Because of the fact that some of these debts are under court orders, the risk of additional penalties exists if, for instance, the court ordered COLA debt and EITC debt remain unpaid and the courts considers sanctions or other penalties for not paying these court ordered debts.
Buyers in the market now are large mutual funds and not equity or stock funds. Buyers in the market are much more conservative and seeking options that have less risk. Even considering the government of Guam’s current financial position, the island’s current economic climate and future economic prospects, this together provides much less risk than most cities, municipalities or states. Michigan including the city of Detroit, for instance, has laid off thousands of workers. Historically, municipal financing is considered less of a risk in the market compared to equity or stock purchases.
Recent buy-outs of Merrill Lynch by Bank of America and Barclays buying Lehman Brothers resulted in much stronger financial entities.
For instance, Bank of America’s purchase of Merrill Lynch resulted in Bank of America now being the largest credit card issuer. Barclays Capital, a subsidiary of Barclays Bank, absorbed Lehman Brothers and has a AA long term rating. Barclays Capital alone has a balance sheet of about $2.7 trillion. Just the other day, Warren Buffet committed $5 billion to buy stocks in Goldman Sachs with an option to purchase additional stocks which reflects confidence in the markets that are un-related to the federal bailout. With JP Morgan Chase now buying Washington Mutual, the trend of much larger and financially capable lenders purchasing troubled financial institutions will set higher standards for responsible lending.
Although there remain credible lenders willing and able to finance a reasonable amount of debt under a Guam bond financing, the need for a deficit reduction plan must become a part of the government’s financial structure. The military buildup funding is still a few years away but after the funding of a government bond financing, there will be millions of dollars in bond proceeds that will enter Guam’s economy. A large percentage of the proceeds will be subject to tax recapture through such taxes as the gross receipts tax and other applicable taxes.
A deficit reduction plan must become part of our borrowing plan like creating for instance a dedicated “Deficit Reduction Fund” which must receive 7 percent of all taxes collected annually in excess of $250,000,000. These funds must then be used annually solely to pay down the deficit.
This is an initial step in the right direction. For decades, thousands of private businesses have borrowed their way out of bankruptcy, but did so with a “Plan of Reorganization” to reduce debt and move toward financial stability. This same concept must be applied in our government’s financial structure.
PETER R. SGRO JR.
Maite, Guam
