A Bloomberg Article that MOST PEOPLE / SHEEPLE WILL NEVER SEE.
(( They're shutting the flow down - this is what causes HIGH INTEREST
RATES ))
(( They get all the BREAKS FROM THE FED-RES, and then SQUEEZE
EVERYBODY THEY CAN ))
(( We're talking STUDENTS - HOSPITALS - ANYONE they can stick it to.))

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Auction-Bond Failures Roil Munis, Pushing Rates Up (Update5)

By Martin Z. Braun

Feb. 13 (Bloomberg) -- Bonds sold by U.S. municipal borrowers with
rates set through periodic auctions failed to attract enough buyers as
banks including Goldman Sachs Group Inc. and Citigroup Inc. that run
the bidding won't commit their own capital to the debt.

Rates on $100 million of bonds sold by the Port Authority of New York
and New Jersey, with bidding run by Goldman, soared to 20 percent
yesterday from 4.3 percent a week ago, according to data compiled by
Bloomberg. Presbyterian Healthcare in Albuquerque and New York state's
Metropolitan Transportation Authority also experienced failures,
officials said.

What began three weeks ago with too few bidders for auction-rate debt
backed by relatively small entities, such as Georgetown University and
Nevada Power, has widened in recent days to include large issues of
state governments, such as New York state's Dormitory Authority. The
auction failures provide new indication of Wall Street's unwillingness
to commit capital amid $133 billion in credit losses and asset
writedowns.

``It's the beginning of the end for the auction-rate market,'' said
Matt Fabian, a senior analyst with Concord, Massachusetts-based
Municipal Market Advisors. ``Banks have stopped supporting the
market.''

Investor demand for the securities has declined on waning confidence
in the credit strength of insurers backing the debt, and on reluctance
by banks to submit bids and risk ending up with too many of the bonds.
Local governments that have borrowed in the $300 billion auction-rate
market confront the prospect of higher borrowing costs as economic
slowing trims tax revenue.

Auction-Rate Bidding

Auction bonds have interest rates that are determined by bidding that
typically occurs every seven, 28 or 35 days. When there aren't enough
buyers, the auction fails and bondholders who wanted to sell are left
holding the securities. Rates at failed auctions are set at a level
spelled out in official statements issued at the initial bond sale.

Some borrowers paid higher rates, even if their auctions didn't fail.
Wisconsin's 28-day auction yesterday of taxable bonds was set at a 10
percent rate, up from 4.75 percent for identical securities Feb. 7.

Frank Hoadley, Wisconsin's director of capital finance, said he had no
advance warning from bankers about the jump in rates. ``We are making
decisions'' about converting the auction bonds to different kinds of
debt, he said.

About $8 billion to $12 billion of auction bonds are scheduled for
bidding daily, so there are many more issues vulnerable in coming
days, said Alex Roever, a JPMorgan Chase & Co. fixed income analyst.

Vermont Student Loans

Yesterday, $27.5 million of federally taxable student loan debt issued
by Vermont's Student Assistance Corp. and insured by Ambac Financial
Group Inc. reset at 18 percent, up from 5 percent as of Jan. 15. Ambac
was the first bond insurer to lose its AAA credit rating.

Local governments are obliged to pay the high rates until either the
auctions start attracting more buyers or they modify the bonds to some
other kind of variable-rate debt or a fixed interest rate. Bankers and
borrowers have been working on conversion plans for several weeks.

The 20 percent rate for the $100 million of Port Authority auction
bonds will cost it $388,889 until the next weekly auction, up from
$83,611 last week. Interest on the bonds is subject to federal income
tax.

`Widening Spreads'

``We have seen widening spreads, reduced demand for certain
auction-rate securities and failed auctions, including some auctions
in which Citi acted as broker dealer,'' Danielle Romero-Apsilos, a
spokeswoman at New York-based Citigroup, said in a statement.

A $100 million Citibank-run auction of state-supported bonds of the
New York Dormitory Authority failed yesterday, resulting in an
interest rate of 6.26 percent, up from 3.12 percent a week earlier,
according to Bloomberg data. Following the auction miss, the interest
rate was set at twice one-month Libor, the London interbank offered
rate for wholesale bank deposits, according to the official statement
for the bonds.

Another failed Dormitory Authority issue, also backed by state
appropriations, resulted in a fail rate of 4.69 percent, up from 3.15
percent a week earlier.

Dormitory Authority Auctions

The Dormitory Authority had five auctions for seven-day securities
scheduled today and tomorrow for the City University of New York. The
authority also reported failures of auction bonds sold on behalf of
Memorial Sloan Kettering Cancer Center and the University of
Rochester, according to Marc Violette, an agency spokesman.

At the Metropolitan Transportation Authority, the fail rate on a $100
million issue of auction bonds was 4.69 percent, according to Jeremy
Soffin, a spokesman for the authority.

The turmoil in the auction-rate market is the latest fallout in a
credit squeeze that began with the subprime mortgage market collapse
last year.

Bidding by dealers is essential to the smooth functioning of auction
securities and banks are now wary of loading their balance sheets with
the bonds, said Roever of JPMorgan Chase.

``This market has been under a tremendous amount of stress,'' Roever
said. ``Without the dealers providing an active secondary bid, it's
very hard for these transactions to clear.''

Bond Insurers

The soured auctions in recent weeks are the first since September,
when about $6 billion of auction debt failed on investor concerns that
bond insurers may lose their AAA ratings, Roever said in a Feb. 8
report. The latest wave began as recently as Jan. 22, when auctions
run by Lehman Brothers Holdings Inc. for Georgetown University and
Nevada Power failed.

Presbyterian Healthcare in Albuquerque, operator of seven hospitals
throughout New Mexico, had rates on $38.7 million of debt reset at 12
percent after an unsuccessful auction run by Goldman yesterday. Bob
Davis, Presbyterian Healthcare's vice president for treasury services,
confirmed the failure, declining further comment.

Michael DuVally, a spokesman at New York-based Goldman, declined to
comment the failures.

Unsuccessful auctions have hurt companies that bought those
variable-rate securities as short-term investments with excess cash,
and are unable to sell their holdings. Bristol-Myers Squibb Co., the
New York-based maker of the anti-clotting pill Plavix, announced on
Jan. 31 a $275 million writedown of its holdings, which totaled $811
million at the end of 2007.

About a third of 449 companies polled in a survey last May for the
Association for Finance Professionals said they permitted investment
in auction-rate bonds.

To contact the reporter on this story: Martin Z. Braun in New York at
mbraun6@bloomberg.net

Last Updated: February 13, 2008 16:06 EST

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