Friday, July 18, 2008

Possibilitly looms for jump in interest rates on CC Project bonds

A subsidiary of Wachovia Corporation, Wachovia Securities Trust, is being inspected "as part of part of a broad probe into questionable practices involving auction-rate securities" accoding to the Associated Press.

The release goes on to explain: "Auction-rate securities had been seen by many as a safe investment. They were used, among other things, to fund municipal projects and agencies. They were promoted by brokers as liquid investments because customers could get out of them quickly.

"The interest rates on such securities were reset at regular auctions, but the market fell apart during the credit crisis when investment banks stopped buying because the paper was seen as too risky. The market's failure left many issuers, including local governments, unable to fund projects or daily operations unless they borrowed at much higher rates. That left investors unable to access their cash."

The bonds referred to above are often called "low floaters" because they only carry a term of one or two weeks (as is the case with the Convention Center Project), thus earning a very low interest rate. A financial institution considered highly solvent guarantees to buy the bonds if there ceases to be a market for them. And often that institution further guarantees to the issuer of the bonds that interest rates will not go above (or below) a certain level which is often referred to as "wraps."

Like other financial institutions that were aggresive in their banking practices (the Convention Center Project being a case in point), Wachovia Bank may be under financial pressures.

As was pointed out by in a letter to NewsLanc, the time may come when Wachovia may make use of certain contractural rights to disengage from its contract with the Convention Center Authority to guarantee that interests rates will not go above a certain level. Of course high interest costs would add to the cost of both the convention center's and the hotel's expenses.

Few if any really know the condition of large financial institutions in these tumultous times. What we do know is that the Federal Government will not allow any major bank such as Wachovia to fail. But this does not mean that the Feds would necessarily step in to protect low interest rates on bonds.