Shortsighted CA schools take virtual 'pay day loans' to keep operating
Tyler Durden has this nailed:
These three letters - C.A.B. - might just be the Dis-Humor story of the day. NPR reports that more than 200 schools across California are coming to the shocking realization that the upfront cash they needed so badly came at quite a price. These 'Capital Appreciation Bonds' are unlike normal bonds (requiring regular coupon payments and principal repayment); instead they provide the 'lent' money upfront and defer all interest and repayment to some magical faery land time in the future (by which time the interest accrued has grown exponentially as the interest accrues on the rising 'principal plus previously accrued interest'). Brilliant - as the Guinness chaps might say. So California schools are now undertaking PayDay or loan-shark style loans defending the idiocy of super-short-term thinking with such statements as "Why would you leave $25 million on the table?" referring to the upfront cash that one Treasurer was able to get his hands on - with clearly no comprehension of the financial instrument's massive convexity. California State Treasurer Bill Lockyer said "It's the school district equivalent of a payday loan or a balloon payment that you might obligate yourself for, so you don't pay for, maybe, 20 years - and suddenly you have a spike... It's so irresponsible."
There has to be some lesson in here - some philosophical reflection on our society's complete and utter inability to see beyond the next cashflow need... Simply mind-blowing...
According to NPR, one California school district, "a $2.5 million bond will cost the district a whopping $34 million to repay."
Where do you think California will come to pay off those loans when they come due? I can't wait to hear the argument they make for a federal bailout. You can bet it's going to be original, that's for sure.
It is unraveling. And when the string breaks, the crash will echo for decades.
Hat Tip: Ed Lasky