California Wants Federal Loan Guarantees

Schwarzenegger Pushing Obama Administration To Help State Out Of Massive Jam

(AP)  If AIG was too big to fail, how about the world's eighth-largest economy?

In a move with only one modern-day precedent, California Gov. Arnold Schwarzenegger and Democratic lawmakers are pressing the Obama administration and members of Congress for federal loan guarantees to help the state out of a desperate, multibillion-dollar jam.

California is not asking for cash, like the tens of billions given to AIG, General Motors or Morgan Stanley. Instead, the state with the worst credit rating in the U.S. is asking that Washington act as a sort of co-signer on the state's borrowing, to be backed up with money from the Troubled Asset Relief Program.

California leaders say that would make it easier and cheaper for the state to borrow money on the bond market, reducing the interest rate by as much as half and saving taxpayers hundreds of millions of dollars.

The Obama administration has responded cautiously to the idea, and members of Congress from other states worry that it would put the federal government in the business of backing municipal bonds - a job traditionally held by investment banks.

They worry also that the U.S. government could overextend itself and risk its triple-A credit rating if California and other states or cities in distress start coming to Washington hat in hand.

But California leaders warn that without assistance from Washington, the nation's most populous state could fall deeper into a financial abyss and resort to even bigger spending cuts and layoffs, becoming a drag on the economic recovery of the nation as a whole.

"There's simply no better stimulus than guaranteeing state and local bonds, particularly those that are being used to get through the crisis and avoid layoffs," said Rep. Brad Sherman, one of 15 Democrats in California's House delegation who signed a letter earlier this month asking for the federal loan guarantee.

Plus, supporters of the idea note that Washington stands to make a profit from loan fees as it did after bailing out New York City in 1975, a move that brought the city back from the brink of ruin.

Because of a steep drop in tax revenue, Schwarzenegger and lawmakers are struggling with a projected deficit of $24 billion, or more than a quarter of the general fund.

Come this summer, California will need to borrow money simply to pay for day-to-day operations. The state does that routinely every year. But this time, the amount California must borrow is a lot higher. And the tight credit market and questions about California's ability to repay are likely to make borrowing extremely expensive for the state.

"We are not asking for a bailout," said state Assembly Speaker Karen Bass, a Los Angeles Democrat. "We're asking for the federal government to step in where commercial banks can't this year because of the crisis within the financial industry."

So far, no other state has asked for such aid. States such as Arizona and Nevada have proportionately larger deficits than California but do not face the same cash-flow crunch. Michigan is in distress too, but stands to benefit from the Obama administration's rescue of the auto industry.

Treasury Secretary Timothy Geithner told a House committee last week that he did not have authority to use financial rescue money to help state governments. But he did not rule out assistance. He said California's request would have to be decided in Congress.

The idea's prospects in Congress are uncertain. But California has far more clout in Washington than any other state, with the nation's largest congressional delegation and a San Franciscan, Nancy Pelosi, as speaker of the House.

Democratic Rep. Barney Frank of Massachusetts, chairman of the House Committee on Financial Services, said he supports legislation to help California and other cash-strapped cities.

"I think if the federal government can go to the aid of major financial institutions, particularly when state and local governments face short-term liquidity issues, I think helping them out is very relevant," Frank said.

California already has cut $15 billion and raised taxes by nearly $13 billion this year. Schwarzenegger has proposed cutting nearly $20 billion more, including eliminating California's welfare-to-work program and getting rid of health insurance for 930,000 poor children.

Other members of Congress worry about the precedent if the government agrees to guarantee California's borrowing. Rep. Darrell Issa, a California Republican, said other states would be certain to ask for help, too, and he warned that the U.S. government's credit rating could be downgraded as a result.

In 1975, President Gerald Ford rejected a similar plea from New York City, prompting the not-entirely-accurate headline "Ford to City: Drop Dead." With the city on the verge of bankruptcy, the president ultimately relented, signing legislation for federally guaranteed loans. The loans have since been repaid with interest.

California is just as likely to repay its loans, said Matt Fabian, a bond analyst at Municipal Market Advisors, based in Concord, Massachusetts. He and others noted that the state has never been late on a payment, and is always collecting revenue and has the option of raising taxes.

"California's not going to default," Fabian said.

But just because the federal government can guarantee California's debt doesn't mean it should, said Allen Sinai, chief executive and global economist for New York-based Decision Economics Inc., which provides financial advice to corporations and governments.

He worries that such action, especially if broadened to other states, could jeopardize the government's AAA credit rating. States, he said, must find ways to make ends meet on their own.

"That's a problem for the state of California, not for the federal government and not for American taxpayers as a whole," Sinai said.

[Ceres6]

Amnesty & Citizenship as a reward for their invasion of the USA, will result in the rest of the USA turned into a Spanish speaking third world cesspool, ....

Posted by american_11-2009 at 4:11 AM : May 28, 2009

How unfair for american_11-2009 to affirm that illegal aliens and Spanish speaking people are responsible for the economic problems in California. The people responsible are simply the Bush administration and the crooks in Wall Street, whose incompetence and greed for money, respectively, almost cause the entire planet to collapse. It is clear that american_11-2009 has a deep hatred for everything that is Hispanic.

[mjvwsr]

will the last american to leave california please bring the flag

[Ceres6]

If all the executives in California returned the megabonus they received for their divine skills, and if the crooks in Wall Street returned the money they ripped off from the people in California, then the Golden State would be in excellent shape financially.

[american_11-2009]

California the Golden state, is fast becoming the poster child for an bankrupt third world State!

An unholy alliance of Socialist Democrat politicians, Unions, and Illegal Aliens supporters are feasting at the trough of tax payers paid benefits while taxing & regulating business and the tax paying public into poverty.

The pandering of Left Wing Democrat Politicians to their constituency of Illegal Aliens, open border supporters, and unions are driving business and citizens to other states & countries, while leaving the parasites & welfare leeches in an increasing bankrupt, dysfunctional state!

For years California has ignored economics 101 and imported poverty, Criminals and uneducated Peons from Mexico, which increased Medical, Welfare, Crime, Prison, etc. & adding a estimated 16 billion per year to Calif. State expense to provide for the invading horde of Illegal Aliens while exporting business and educated working tax payers.

Like all Socialist & Marxist States the results have been an lowing of living standards, tax receipts & finally bankruptcy.

Failure to abide by our Constitution against invasion & enforce our Immigration laws and constraints on wages and benefits for public employees will result in turning the Golden State into MexiCalif and the end of the California dream!

The policies of Obama and Wash. DC Democrats are intent on following Calif. policies and are resulting in the same creeping socialist process across American.

Amnesty & Citizenship as a reward for their invasion of the USA, will result in the rest of the USA turned into a Spanish speaking third world cesspool, modeled on Mexico and follow California into a polluted, over populated, Spanish speaking third world Nation of Crime, Corruption, Poverty, & Misery!

This will result in a population depending on Welfare and the Democrat party, thus assuring the lock on power for the Socialist Democrat party of the United States of Mexico!

[mutnauq4842]

I was out West a few years back a noticed that the head of a small company had put in a watering system for about 10 trees he had planted. It seems there was not enough annual rain fall to support their growth. There irony was that they were pine trees-something folks back east take for granted.

The pretense and arrogance of California and Nevada with respect to "the desert good life" is in my opinion appalling.

[boatdocster]

They worry also that the U.S. government could overextend itself and risk its triple-A credit rating if California and other states or cities in distress start coming to Washington hat in hand.

Newsflash to Washington DC - 11 trillion of federal debt (with 6-8 trillion courtesy of George W "Shrub" Bush) is over extended!!!!

[beach671]

The gays are fleeing San Francisco for....Texas.

Isn't it funny how Social Democrats are fleeing their bankrupted Social expiraments for the Republican States that still have money and growth and jobs?

I pray for Texas. You've taken in alot of enemies to the Republic that have bankrupted entire STATES....I pray you don't fall to their eventual efforts to turn Texas into California.

[veils-2009]

This is the biggest joke ever! Arnold is a fun action movie actor but his governing skills are failures. Is it because California's laid back style lets him play governor while their state is falling in an ocean of debt?

The federal government should not step in with this responsibility at this time. Just like the auto industry, California needs to change the way it does business. Every state should operate with a balanced budget. Perhaps California, being the trend setter it is, can be the leader in having a more responsible government.

[jolsonbear]

Let them sell marriage licenses to same-gender couples if they want to raise money!

[rememberthis]

Posted by NoTruthinDC at 8:30 PM : May 27, 2009

Which groups of voters outside the slight majority of the 21% that now claim to be Republicans have you not insulted lately?


Oops, you just got a significant number of them writing off California ---
Posted by rememberthis at 8:45 PM : May 27, 2009


In case you forgot a couple of days ago you slammed the independents that voted for McCain too ---- so much for the 26% that were independents that were part of the 47% that supported McCain.

[rememberthis]

Posted by NoTruthinDC at 8:30 PM : May 27, 2009

Which groups of voters outside the slight majority of the 21% that now claim to be Republicans have you not insulted lately?


Oops, you just got a significant number of them writing off California ---

[Professor2U]

What has the State done with all the BILLIONS it has collected??? California has the HIGHEST TAXES in the whole U.S. WHERE did ALL the money go??? You listen to this governor talk and you would think he was closing the whole State. Yet, WE are paying the HIGHEST State income tax, sales tax, car registration taxes, etc. etc. SHOW ME THE MONEY!!!

[sjc_1]

"liberal fiscal policies"

Arnold is a Republican who failed to rewrite Prop 13 in 2003 when he was advised to do so by his friend Warren Buffet. If he had made property tax more fair for everyone, he would have run a surplus, paid off debt and not be in the mess he is in now. I would say not rewriting Prop 13. was a failed policy by a Republican.

[jonesjep]

So liberal fiscal policies have destroyed the State of California and GM and Chrysler. Not to mention every other Socialist economy EVER. And yet a large part of America can not see how dumb liberal policy is.

[TrickynWV]

Dear Arnie: You want to borrow MY TAX PAID MONEY for California? Ok. 200% interest, compounded daily. I think you better ask for a loan from your rich religious radicals who defeated Prop 8