Wednesday, 29 December 2010 09:27

NYC Goes Out "Euro-Style" As It Experiences The Results Of "Applied, Stealth Austerity" And Its Citizens Suffer Like Never Before!

In 2008 I gave explicit warning that an unprecedented swath of US municipalities were at risk of default. I was pooh poohed by many "experts" who consistently said that the history of default in the US muni bond market is slim to none. Well, my friends, that is history and this is now. The dearth of revenues from declining building permits, sales taxes in the absence of real sales, property taxes from depreciating properties, etc. - all built upon budgets that were carved at the peak of bubble economics groupthink combine to make a disastrous brew.

NYC, arguably the richest economic "city state" in the world and the mecca of banking and real estate is experiencing "applied austerity" programs, effectively going through the service and government payment cutbacks that the Europeans are "promising" to deliver. Keep in mind that NYC is comparable to, if not larger than, from an economic footprint perspective Greece and Portugal. I have accurately determined that the EU is in it very deep - deep enough that default of several nations is a foregone conclusion (see the complete Pan-European Sovereign Debt Crisis series for more on this).

Despite the nearly guaranteed default of the Euro-area nations, it ain't pretty over hear either, particularly as those eliminated services that have been taken for granted are needed, as in the post Christmas mini-blizzard. I say mini-blizzard because real New Yorkers know that 16 inches of snow is close to a regular occurrence. We get snowstorms nearly every year, but this one literally shut the city down - completely down.



[caption id="attachment_4294" align="alignnone" width="490" caption="BoomBustBlog: An upper middle class, tree-lined neighborhood in NYC pictured a full 72+ hours after the snow storm. These are the bankers, doctors, judges & lawyers that cannot go to work to generate the wages that the city needs to tax to generate the revenues that could clean these streets. Nornally, these streets would be cleaned down to the blacktop by sunrise!"][/caption]






[caption id="attachment_4298" align="alignnone" width="593" caption="MTA NYC Transit Delays Continue 4 Days After Snow Storm. Up To 48 hours after the storm, the entire mass transit system was effectively shut down. This is how the vast majority of NYers get back and forth from work."][/caption]




From the NY Times:


A woman with stroke symptoms in Midwood, Brooklyn, waited for an ambulance for six hours, finally arriving at the hospital with telltale signs of advanced brain damage. In Forest Hills, Queens, bystanders waited for three hours next to a man lying unconscious in the snow before they were able to flag down help. And in Crown Heights, Brooklyn, a mother in labor who started calling 911 at 8:30 a.m. on Monday did not get an ambulance until 6 p.m., too late to save the baby.

As a blizzard bore down on New York City on Sunday and Monday, 911 dispatchers fielded tens of thousands of calls, trying to triage them by level of severity, from snowed-in cars at the low end to life-threatening emergencies at the highest. But even the ambulances assigned the most serious of the calls sometimes could not get there. At least 200 ambulances got stuck on unplowed streets or were blocked in by abandoned cars, city officials said Tuesday.

As the backlog of calls grew — it ultimately reached 1,300 at its highest point — an unusual directive went out across the computer screens within ambulances, emergency workers said. It told them that after 20 minutes of life-saving effort on a nonresponsive patient, they should call a supervising doctor, who would make the call about whether to give up. While it is rare for a person to be revived after 20 minutes, it is usually up to the medical crew to decide when to call the doctor.

... nearly 170 stranded ambulances had been dug out by emergency crews, with 40 more still stuck Tuesday morning. Still, the impassibility of many streets made routine ambulance runs into odysseys, sometimes with life-threatening or fatal consequences.




[caption id="" align="alignleft" width="190" caption="LOSING TIME A Fire Department ambulance got stuck on Madison and Nostrand Avenues in Brooklyn."][/caption]





In East Midwood, volunteer ambulances managed to complete nine calls on Monday between getting stuck in drifts and between abandoned cars. One was to a 74-year-old woman on Lawrence Avenue who appeared to be having a stroke. Her home-health aide had called 911 at 9 a.m. on Monday, said Yakov Kornitzer, the chief of operations for the East Midwood Volunteer Ambulance company, and in the early afternoon, she finally ran to the local precinct station for help.

When the ambulance arrived at 3 p.m., it was unable to get closer than several blocks away. Two emergency workers, two paramedics and six police officers carried her on a stretcher through knee-deep snow, but by then she was unresponsive and her limbs were already flexed, indicating serious damage to her brain tissue.

...

When a fire broke out five blocks from Elmhurst Hospital, emergency workers pulled patients in on sleds and toboggans, said Dario Centorcelli, a hospital spokesman. As at other hospitals, doctors and nurses stayed, sleeping on cots. At Lutheran Medical Center, a registered nurse and an orthopedic technician spent the day Monday driving around Brooklyn in a Hummer, to ferry exhausted staff members back and forth.

...In Rego Park, one volunteer ambulance partnered with a four-wheel-drive Suburban to patrol streets. About midnight, they were flagged down on Queens Boulevard and 62nd Drive, where bystanders said they had called 911 three hours earlier for a man lying face up in the snow.

He was unconscious but still alive, suffering from severe hypothermia, said Ron Cohen, the public information officer for the Forest Hills Volunteer Ambulance Corps. The emergency workers carried him about a block to the vehicle, and he made it to the hospital alive. “I think a short time longer and he may not have been,” Mr. Cohen said.

... Fire Department officials said they received a 911 call at 8:30 a.m. on Monday from a woman in labor in Crown Heights. But because her birth was not imminent, she was assigned a nonemergency status. Dispatchers tried to call back several times in the next few hours to check on the woman, but got no response, the Fire Department said.

At 4:30 p.m., a second call came in, saying there was bleeding and the baby was crowning, and dispatchers called for police and medical crews.

Around 5:20 p.m., police officers, trudging through the snow because their cars could not get through, found the woman outside 97 Brooklyn Avenue and brought her into the vestibule. It was not clear if the woman was just waiting outside or was trying to make it to the hospital on her own; Interfaith Medical Center was about eight blocks away.

The baby emerged. Satomi Onikura, 34, a nurse who lives in the building, said she saw five or six police officers surrounding a woman swathed in blankets. The baby was laid out on blankets and was not breathing. The umbilical cord was still attached. “We were all in a panic,” she said.

An officer got scissors and dental floss to sever the cord from another neighbor, Valerie Veator, 24. Her father had been an emergency medical technician, and spoke on the phone with the police.

The lobby was freezing and wet from the snow and wind. Ms. Onikura did chest compressions until the emergency medical crew, whose ambulance had been stuck, finally arrived to take the mother and baby to the hospital, but the baby did not survive.

This is the real deal! This is the UGLY side to the greed that brought upon the Asset Securitization Crisis which spawned all of this nonsense. Did anyone believe that banks could do this much damage. I know I sure warned many! Here are some more examples...

Crain's New York: Mayor: Doing 'everything we can' to clear snow

In the face of mounting criticism over the city's strained response to a post-Christmas snowstorm that left ambulances and buses stranded, trains stalled and roads blocked, Mayor Michael Bloomberg on Tuesday defended his administration's efforts.

“We are doing everything we can think of, working hard as we can,” he said at a press conference Tuesday morning in Brooklyn. “This city has pulled together. I don't think we should sit around and think the end of the world is near. We cannot be every place at all times. We won't get to everybody. We will make mistakes.”

... “By all accounts, the collective storm response was not anywhere near up to the standards New Yorkers are accustomed to,” said City Council Speaker Christine Quinn, in a statement.

I fear New Yorkers will have to get use to a new normal for the next couple of years, at a minimum. Professional and institutional Subscribers can download our Shadow Inventory worksheet to see just how long and far  real asset/derivative malaise is forecast to drag this city – File Icon Shadow Inventory.

Ms. Quinn scheduled oversight hearings for Jan. 10 into the city's “unacceptable” blizzard response, which she said underscored the need to “protect core public services from potentially life-threatening budget reductions.”

... the No. 1 obstacle facing workers as they continue to try to clear snow from the streets. Teams cleared 168 ambulances overnight that had been stuck, but some 40 remained on the list as of this morning.

“Until we can pull out ambulances, fire trucks and buses, the plows just can't do anything,” he said. Some 600 buses got stuck, 250 of which remained trapped in the snow and ice as of Tuesday morning, leaving officials at a loss. “We typically have not had difficulty with stuck buses,” said Metropolitan Transportation Authority President Jay Walder. “They're heavier and have typically been able to get through the snow. For whatever reason, this snow they did not get through. I'm not a snow expert to say why.”

This is the kicker, below!

The mayor rejected the notion that the problems clearing the streets were the result of a rumored slow down by workers upset over the administration's reclassification of sanitation supervisors and by looming budget cuts. He said Deputy Mayor Steven Goldsmith met with union officials Tuesday, who assured him workers were doing all they could.

...

“The response was an epic fail,” he said. “We have not received answers to basic questions: Where the hell were the plows? The plows did not exist on side roads in the outer boroughs. We need to know why.”

State Sen. Carl Kruger, D-Brooklyn, said the emergency room at Beth Israel Medical Center in Brooklyn was blockaded by snow until Tuesday morning and that a stalled city bus was blocking an oil delivery at Maimonides Medical Center.

“It defies comment,” he said. “I don't know how we can be caught off guard when they were predicting the storm for a week in advance.”

Mr. Kruger compared the city's response to that of the infamous 1969 snow storm that nearly wrecked the administration of Mayor John Lindsay and made snow removal outside of Manhattan a key litmus test for any city leader.

“I'm 61 years old and I've lived through a lot of 16-inch snowfalls before,” Mr. Kruger said. “It's not just me hyperventilating. It's a city that's frustrated and not understanding the lack of management and control of the situation.”

The last statement is key. NY gets snowstorms - a lot of them! They not only fail to shut the city down, they rarely even close the schools for more than a day. This is obviously the effect of the "stealth austerity" plans that have stricken the city, and every occurrence that will require a strain on the city's services will have similar outcomes until the city has more resources to bring to bear. That will not be anytime soon. Keep in mind that this malaise was after the federal government literally pumped trillions of dollars into the industries that are the life blood of NYC, the FIRE sector (finance,insurance and real estate). For more on this multi-trillion dollar stealth bailout of both FIRE and NYC, see:

It is not inconceivable to fantasize about crucial city services that save lives getting more of that multi-trillion federal assistance than bondholders behind failed and fraudulent banking practices, no? As for the anticipation that this will resolve itself by next year...

.

So, where does this leave us? Well, if it is clear that European states will probably default, why wouldn't the same apply to US municipalities? Three years ago (in 2007) I warned of an extreme spike in muni defaults. Here is an annotated excerpt of a more detailed warning written in 2008 when everyone thought I was being a "bear" (actually, it should be called a realist with a spreadsheet and objective perspective)...

From the Municipal bond market and the securitization crisis – part 2

Further building on the Municipal bond market and the securitization crisis – part I, we have calculated the likely default amount on the municipal bonds issued in the last four years (2004 to 2007). We have assigned default rates on the municipal bonds for various states on the basis of property price decline and the decline in the building permits witnessed in each state. In this analysis, we have also considered defaults on the general obligation bonds (GO bonds) as the macroeconomic conditions have deteriorated and could result in increased stress on municipalities. Although historically, the GO bonds have defaulted rarely (the contribution to total default by Municipal bonds is 3.54% for GO bonds and the remaining 96.46% defaults is on Revenue bonds), declining property prices and rising foreclosures are likely to have a negative impact on municipalities’ revenues in the form of taxes.

Since we have maintained from the beginning that this crisis is far worse than any crisis that the US economy has witnessed for close to half a century, our underlying assumption while calculating the default probabilities by GO and Revenue bonds has been a premium over historical default rates on the munis for the period 1979-97. This premium is dependent on the degree of decline in housing prices, building permits and the broader infrastructure investment. In the case of Revenue bonds, the multiple has been considered higher as compared to GO bonds since historically; Revenue bonds have defaulted more than the GO bonds.

House price decline

Building permits decline

Premium over historical defaults for Revenue bonds

Premium over historical defaults for GO bonds

-5%

-10%

1x

1x

-10%

-20%

2x

1.5x

-15%

-30%

3x

2.0x

> -15%

> -30%

4x

2.5x

We have calculated the likely defaults on municipal bonds issued since the year 2004 since this is the period where most US state and local governments had prepared budgets based on the existing real estate boom. In addition, the prevailing low interest rate environment was very conducive for muni bond issuance. However, with the collapse of the housing market, property values went down and increasing numbers of homeowners applied for the property revaluation to reduce their property tax burdens. This increased the burden on the respective municipalities, as homeowners, in an attempt to mitigate the increase of their financial obligations obtained during the housing boom equity spending spree, cut corners by any means necessary. Construction permits and the associated fee income dropped precipitously, further constricting the bloated budgets of municipalities who, like the fabled subprime refinancing, SUV driving 1st time homeowner binged on easy equity-sourced cash.

Additional strains in the revenue sourcing for municipalities are the rampant foreclosure rate increases and the actual volumes of foreclosures. Up until the event of actual foreclosure, property taxes are usually not paid, further hampering the cash flows of municipalities that relied on these funds. It gets worse. Even after foreclosure, and even on behalf of the municipality, the back taxes cannot be monetized and actually paid until the property is sold. Many auctions in high foreclosure areas are seeing properties with no bid at the upset price.

This is being exacerbated by the continual fall in prices (see ).

This portends very bad things for the banks, the municipalities and the insurers who wrote insurance to cover them! See

  1. What is the Fallout of the Ambac Bankruptcy on the Investment Banking Industry? Robo-signing Conspiracy Theory Grows Some Balls Monday, November 15th, 2010
  2. Banks, Monolines, and Ratings Agencies As The Three Card Monte (Wall)Street Hustlers! Its a Sucker’s Bet, Who’s Going to Fall for it in QE2? Tuesday, November 9th, 2010
  3. The Inevitable Has Come To Pass and Those That Insured Guaranteed Blowups Are Being Blown Up! Monday, November 1st, 2010


These developments are likely to have a severe negative impact on the tax inflow for the state and local governments which forms the basis of our underlying assumptions. According to our estimates, on the total municipal bond issuance of US$1.6 trillion in the year 2004-07, the potential losses due to defaults will be US$22.8 billion or a default rate of 1.44% with Revenue bonds contributing majority of the default amount of US$22.5 billion while GO bonds account for US$304 million. This indicates a default rate of 2.12% for the Revenue bonds and 0.06% for GO bonds.

In the multifamily housing segment, default rates increased significantly and were extremely high for the period 1987-90, i.e. at the time of the S&L crisis when real estate lending was reckless due to declining lending standards by banks and other financial institutions. The default rate peaked in 1988 in the eleven year period reviewed to 4.31%, followed by 3.41% in 1989.



Those who are interested in reading more on my 3 year old muni sector analysis should read Municipal bond market and the securitization crisis – part I and Municipal bond market and the securitization crisis – part 2. Those interested in subscribing to our research services can do so by following this link.


Last modified on Thursday, 06 January 2011 12:11

8 comments

  • Comment Link Pieter Silvius Wednesday, 29 December 2010 18:23 posted by Pieter Silvius

    Dear Mr. Middleton,

    Except for your fascinating blog I'm reading economic publications in French en German.
    Franz Hörmann and Herbert R. Haeseler, mainstream scientists from the Wirtschaftsuniversität Wien, Johannes Kepler Universität Linz and Universität Graz have written "Controlling & Tax Management" (Verlag LexisNexis). Mathematical calculations predict dramatic events on the short term for precisely the same reasons as in your blogs: growing sovereign debt until interest cannot be paid any more will violate the trust in the currencies and the dollar and the euro may crash as soon as 2011!

    Report
  • Comment Link fedwatcher Wednesday, 29 December 2010 15:38 posted by fedwatcher

    "Stealth Austerity" is a great term to describe the results. Maybe the same numbers of city workers are available, but could not there be 'deferred' maintenance on the equipment they use that results in less effective snow removal? Could not a loss of moral result in a less effective snow fighting force? And let’s not forget the reduction in people willing and able to clear the snow from their own vehicles and instead wait for the city to do it for them.

    Back in the 1950’s I remember shoveling snow to prepare a path to the school bus so that I could make it to the school bus the following day. I remember me and my dad clearing the snow from and around the car, using hot water to unfreeze locks, and having shovels and sand in the car’s trunk.

    In total “Stealth Austerity” is clearly present but the public has not come out to help fill in the gap. The civic minded souls who provided emergency volunteer ambulances can grow as there are plenty of private four wheel drive SUV’s parked in the streets.

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  • Comment Link Pie_Row Wednesday, 29 December 2010 14:57 posted by Pie_Row

    QED. You don't need to see it to know it is there. Don't show up because if you do you wont get paid. I've had a payroll check bounce before. It doesn't take long to get the idea that you need a new job.

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  • Comment Link Rumi Wednesday, 29 December 2010 14:35 posted by Rumi

    Are you sure? All the links still seem to point to Pt2.

    BTW, hope you are enjoying the holidays :o)

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  • Comment Link Reggie Middleton Wednesday, 29 December 2010 13:22 posted by Reggie Middleton

    What evidence do you need? The revenues to the city have been decimated through reduced building permits, decreasing property taxes, lower sales and income taxes and a bloated budget from the bubble years. The reason it was called stealth austerity is because the city is going on a de facto diet due to the fact that the monies are just not there.

    Or is there another reason why a mere 16 inches of snow has shut down the most metropolitan city in the world for the first since the use of modern snow removal techniques have been in use.

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  • Comment Link Black Matt Wednesday, 29 December 2010 12:58 posted by Black Matt

    Long article but really no evidence given for this theory of "stealth austerity" causing this. We are just supposed to accept Reggie's conclusion that "This is obviously the effect of the “stealth austerity” plans that have stricken the city."

    Do you have more references to what this "stealth austerity" is Reggie? Numbers on staffing and budgets? I'm googling and all I've come up with is other vague reports of some Sanitation Dept. issues with Bloomberg and his Deputy Mayor over overtime and staffing issues.

    His proposals for big cuts and freezes haven't even taken effect yet...

    http://online.wsj.com/article/SB10001424052748704129204575506342696760542.html

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  • Comment Link Reggie Middleton Wednesday, 29 December 2010 10:56 posted by Reggie Middleton

    Done

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  • Comment Link Rumi Wednesday, 29 December 2010 09:48 posted by Rumi

    Reggie,

    Could you please correct the link to "Municipal bond default analysis Part 1"? Currently, it links to the same page as "Municipal bond market and the securitization crisis – part 2. "

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