California Or Romania? Where Is Your Money Safer?
    By Hank Campbell | July 15th 2009 07:22 PM | 10 comments | Print | E-mail | Track Comments
    About Hank

    I'm the founder of Science 2.0®.

    A wise man once said Darwin had the greatest idea anyone ever had. Others may prefer Newton or Archimedes...

    View Hank's Profile
    In the 1980s, Michael Milken went to jail for selling "junk bonds", which were risky debt.  His crime?  Offering to absorb all of the losses if he could have half the profits.   Some of the bonds he sold yielded 18%.   Like I said, risky.   He made a lofty set of claims, vague threats and some questionable promises to get people to buy them.

    California state Treasurer Bill Lockyer is also selling junk bonds and using vague threats and questionable promises, but these ones only yield 6%.   Chances of him going to jail?   Not high, because he's exempt unless he engages in dog fighting or runs over a kid in the parking lot.   

    What's the difference between a corporate junk bond and a state one?  Apparently only the interest rate.  A London financial firm going by the name CMA evaluates credit-default swaps, which are like insurance for bondholders.    From an insurance point of view, CMA places the likelihood of defaulting on its debt obligations in the next 5 years at a whopping 26.75%.

    It's rubbish, according to Lockyer's office.  Yet the state has a $26.3 billion deficit and no one ... I mean no one ... who has been sucking at the taxpayer teat since the heady days of Gray Davis' .com boom capital gains tax windfalls, thinks they should give any of it up.   Prison guards, who negotiated with Davis what was later called the greatest labor contract in history, aren't budging despite having salaries 50% higher than the #2 state in the US.   Nor or any of the tens of thousands of loyal Democrats ... errr ... university employees ... Davis hired after his last election.   The UC system alone now employees a whopping 180,000 people - triple what it was in the 1990s. 

    The state's issuing IOUs ... which banks don't want to touch ... but not to state employees, only to vendors.  Fitch Ratings puts the bond rating at lowest in the entire US.    So Californians can make fun of Tennessee and Mississippi but at least they can pay their bills.

    According to CMA, Romania, former Soviet puppet regime (where all the hot girl spies came from, in case you get it confused with neighboring Bulgaria, where all the male Russian spies came from - because they look American) is a better risk than California.   Worst off is Argentina, where the oddsmakers have it at 73.8%, followed by Ukraine and Venezuela.   California is better off than Iceland, which is already bankrupt.

    Is 6% a lot of money?   Sure, compared to states not at risk, which pay under 5%.   To put that in perspective I had a CD a few months back that was at 3.3% but that was a limited offer and I can't get that now that the government is printing money on overtime and banks aren't worried about a cash crunch.   

    Should I be concerned?  Well, no, I would never buy California bonds.    I'm wrong in my thinking, according to state Treasurer Lockyer, who says that paying off debt service is the state's second highest priority.

    The first?   Paying the members of the teacher's union.


    I don't complain about the taxes as much as I used to (they are 6X what I paid in Pennsylvania), though I am not sure I get a lot for my money.  However, two things work really well that you wouldn't expect, given their overall reputation; voting and the DMV.   So we have that going for us.

    Paying an $800 fee to the state to open a corporate checking account, though, is why we have our checking account in Pennsylvania instead.
    Becky Jungbauer
    they are 6X what I paid in Pennsylvania
    Whereas I am exceedingly grateful to not be paying D.C. taxes alive! PA is ridiculously affordable after that.
    I am going to rant about two political things this week but, hey, it's a blog.   On this issue, though, Kim has checked my attitude more than once by noting that I met her here but also, in her most devastating riposte some years ago, noting that complaining about California costs while I ate sushi in my jacuzzi in the middle of winter wasn't exactly going to resonate in the heartland.  So I had a cigar and thought about it, a ritual I will undertake again this evening.
    Becky Jungbauer
    I'm telepathically sending you loathing and envy vibes.
    I didn't even bother with a pool in PA.   I liked the seasons, I liked the green, liked the people.   Right about February the winter there makes me crazy, part of the reason why every year I go to FL for baseball spring training.  But now the weather here makes that part a non-issue.
    Connor Davidson

    I personally would put my money in US treasury notes as I am sure that if I lost my money, money would be the least of my worries

    State bonds are triple tax exempt so they have some value - if we're convinced a state can't go out of business, it's a decent investment.     The issue with Caifornia is that constitutionally the actual debt is not the most important debt obligation; payments to special interests are.   That doesn't give investors the warm and fuzzies.  Being in the top 10 risky investments out of some 8000 government bonds for only 6% interest is not great.
    Connor Davidson
    I know they are not a very profital investment but they are safe and that is the point. If I wanted to make heaps of money I woudn't use them.
    You gays should read a little about history....
    Romania was never USSSR's pupett

    The Warsaw Pact countries all had puppet regimes loyal to the USSR.   This is not a subjective assessment.  Sometimes history has to speak in plain facts and Romania's status from the end of WW2 until the collapse of Soviet communism is a fact.

    This is not to say that Ceauşescu did not take a dangerous stand for freedom after the Russians invaded Czechoslovakia, and he was applauded for that worldwide, but denying they were a puppet state when the Soviets created the new government and put in place only communist supporters in 1945 is in defiance of the history everyone knows, including Romanians.    You might also deny Romania was an Axis country fighting for the Nazis prior to that but it is also in defiance of fact.

    I used Romania as an example of a new democracy that should not have a better financial risk than California.   Granted, I have only visited Romania and never lived there, but I always try to go off the beaten path and the people I met were wonderful and it is rich in culture.  The people were kind enough to keep me away from any mafia people, also a risk in an emerging free market democracy.   :)