Text of Schwarzenegger letter to Paulson

Yesterday, California Governor Arnold Schwarzenegger wrote U.S. Treasury Secretary Hank Paulson to warn him that California was suffering a liquidity problem and needed federal assistance in order to avoid insolvency.

Below is the text of that letter.

First of all, let me commend you for your leadership to enact emergency economic stabilization legislation. This credit crisis has the power to grind the U.S. economy to a halt if swift and decisive action is not taken immediately. The federal rescue package is not a bailout of Wall Street tycoons – it is a lifeboat for millions of Americans whose life savings, businesses, retirement plans and jobs are at stake. I have communicated this message to the entire California Congressional delegation and will continue to press for passage of an emergency rescue plan.

Like many other states, California is feeling the enormous effects of this crisis on our economy. California’s economy is dynamic and resilient, but also uniquely sensitive to national and international economic conditions and fluctuations in the financial markets. The credit crisis has frozen investment and commerce, forcing businesses and families to stop purchasing goods and services. This has resulted in tens of thousands of lost jobs and billions of dollars in lost tax revenue to the state.

Most immediately, California and a number of other state and local governments are experiencing the lack of liquidity in the credit markets firsthand. Many states and local governments have been unable to secure financing for bond offerings and for routine cash flow used to make critical payments to schools, local governments and law enforcement. While some states may be able to absorb a delay or obtain high-interest financing through private banks, California is so large that our short-term cash flow needs exceed the entire budget of some states. We expect to issue $7 billion in Revenue Anticipation Notes for short term cash flow purposes in a matter of days.

Absent a clear resolution to this financial crisis that restores confidence and liquidity to the credit markets, California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the Federal Treasury for short-term financing.

Schwarzenegger to U.S.: State may need $7-billion loan – LA Times

  1. Mark Wadsworth says

    This is what is sometimes referred to colloquially as pork barrel spending’.

    On a more serious note, what do you think of debt-for-equity-swaps?

  2. Edward Harrison says

    Hi Mark,

    Your comments on Buiter’s blog are pretty interesting. However, I think most people would balk at restricting the CDS market the way life insurance policies are restricted. Things would have to get a lot worse before we get there. Interesting concept, but not likely to fly I think.

    As for Buiter’s debt-for-equity conversion, he’s on to something. Again, I don’t think we’re there yet, but it would be a fair and less onerous way of recapitalizing the banking system than liquidation and bankruptcy.

    I think John Paulson made a similar proposal for Fannie and Freddie before they were nationlised. If you were a Lehman Brothers debt holder, wouldn’t you rather take a haircut and get equity rather than go into liquidation? They me a bad example because they were insolvent, but for companies like Morgan Stanley, that might be a good option.

    Mark, what are your feelings about Buiter’s comments?

  3. Mark Wadsworth says

    The stuff about CDS’s is only in the comments, that’s not central to the debate (I hope).

    Having given this a couple of minutes thought, naked selling of CDS’s is just short selling of a bank’s bonds (only much more complicated).

    If this was a straight gamble between speculators, then so what? Money changes hands, some hedge funds lose, others win.

    If a bondholder bought a CDS a while back, he can now offload his new bonds and shares on the seller of the CDS. All things being equal, the market value of the new bonds and shares won’t be much different from the ‘toxic’ bonds beforehand.

    I don’t think this CDS stuff is central to the debate. Or perhaps I’ve missed something, and it is?

Comments are closed.

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