The man who trades freedom for security does not deserve nor will he ever receive either. – Benjamin Franklin
More than 100 local councils, charities, churches, hospitals and nursing homes across Australia are sitting on a $2 billion black hole after buying subprime investments structured by Wall Street banks during the bull market but which are now potentially worthless.
Melbourne’s Metropolitan Ambulance Service and local councils are among those facing losses of hundreds of millions of dollars in the subprime meltdown because of bad debt they bought through a global investment bank.
THE SUBPRIME mortgage crisis that pushed homeowners into foreclosure and forced the Federal Reserve to bail out investment banker Bear Stearns has also sent state and local governments across the country scrambling to refinance municipal bonds before they are hit with exorbitant interest rates.At the center of the storm are long-term variable-interest bonds known as “auction-rate securities.” Unlike traditional fixed-rate bonds, the interest rates on these securities are reset every 7, 28 or 35 days through an auction process.
Historically, the rate paid has been less than on traditional bonds, making the national $160-billion auction-rate market a reliable source of cheap financing.
But that market has collapsed in the past two months, sending interest rates climbing. As a result, California, Richmond, the Bay Area Toll Authority, the East Bay Municipal Utility District and Sacramento County are among countless government agencies forced to restructure their bond debts.
Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen
ARROYO GRANDE, Calif. – “Charlie and I believe Berkshire should be a fortress of financial strength” wrote Warren Buffett. That was five years before the subprime-credit meltdown.
“We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
Read moreDerivatives Have Become the World’s Biggest Black Market