Tuesday, September 9, 2014

Fed Favors PEU Funding of Public Infrastructure

Washington's Blog reported:

In an inscrutable move that has alarmed state treasurers, the Federal Reserve, along with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, just changed the liquidity requirements for the nation’s largest banks. Municipal bonds, long considered safe liquid investments, have been eliminated from the list of high-quality liquid collateral. assets (HQLA). 
Who has trillions on the sidelines marked for public infrastructure, normally financed by municipal bonds?  Private equity underwriters (PEU's) do.

By disqualifying municipal bonds from the category of liquid assets, the biggest banks are likely to trim back their holdings in munis which could raise the cost or limit the ability for states, counties, cities and school districts to issue muni bonds to build schools, roads, bridges and other infrastructure needs. This is a particularly strange position for a Fed that is worried about subpar economic growth.
It's not strange for a Fed favoring the billionaire PEU class. This would dramatically shift infrastructure funding to the private sector, where PEU's have replaced banks by securitizing huge chunks of corporate debt.

A second stressor is coming for municipalities, GASB requirements for public pension fund accounting.  Government pensions will need to get greater returns to stitch the gargantuan hole in their balance sheets from 2015 pension fund liabilities.  That means rolling the dice on PEU investments.

What if cities could invest public pension funds in PEU's and have the PEU finance their public infrastructure?  The PEU gets 20% annual return on equity and the public gets addicted to external, vulture funding   You get the Fed picture.

Just as human resources became a tool to treat people inhumanely, regulation and accounting have become tools for the greedy and arrogant.  It's a PEU world, where politicians red and blue love PEU.