

How Wall Street Tobacco Deals Left States With Billions in Toxic Debt - cwal37
http://www.propublica.org/article/how-wall-street-tobacco-deals-left-states-with-billions-in-toxic-debt

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spindritf
I don't understand how the states are losing on those deals.

 _As designed, private investors — not the taxpayers — would take the hit if
people smoked less and the tobacco money fell short._

Then why are the states supposedly settled with the debt resulting from the
forecasts being too optimistic? Was the 500 million dollars worth of financial
engineering botched so badly that it failed to achieve its primary goal?

Also,

 _Under the deals, the debts must be repaid with settlement money and not tax
dollars._

which to me means that the states at worst lose this unusual source of revenue
from the settlement. A source that is drying up faster than predicted. This
should not lead a state into bankruptcy or defaulting on other obligations.

It seems that Cordray was right

 _“Five years from now, 10 years from now, smoking bans are kicking in, taxes
may change, maybe court decisions. If the tobacco companies are not
profitable, Ohio would be out its money. But if we cash in now, we will have
our money and we will shed the risk,” Cordray was quoted saying in a July 2007
report by The Associated Press._

and he thinks he was right

 _Cordray told ProPublica the state made the right decision. The decline in
tobacco payments means they were riskier than believed, he said, and CABs
helped the state maximize its proceeds. If payments decline further, he said,
investors should pay the price, not Ohio._

 _“Obviously, they are always going to want to come back, cup in hand, saying
to the state, ‘Put some money in it,’” Cordray said. “But it’s not necessary;
it’s not legally required and in fact was the whole purpose of this deal.”_

Private investors are taking the hit, selling the debt at pennies on the
dollar to hedge funds, while states get to keep the money they made by selling
those capital appreciation bonds in the first place. Whether it was wise to
turn nice steady revenue flow into a one time payment is another question but,
as sbmassey notes, you can't really expect democratic politicians not to.

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fiatmoney
This looks to me like someone is trying to get a meme going that states "have
to" pay these bonds. The radio version of this story on NPR was leading much
stronger in that direction.

[http://paulgraham.com/submarine.html](http://paulgraham.com/submarine.html)

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cwal37
An investigative piece from ProPublica into the piecemeal securitization of
the 1998 tobacco settlement revenue, and the increasing toxicity of the
ensuing debt. States essentially sold out their future revenue stream, and
committed to paying more back out in order to plug short-term budgetary holes.
These obligations extend for decades, and have ballooned into the billions of
dollars, dwarfing what the actual payouts would have been. It is unlikely that
these bonds will ever be repaid to the agreed upon terms.

The securities in question are Capital Appreciation Bonds (CABs).

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fred_durst
Here's some more info on CABs and the effect they are having now, and how much
damage they are likely to do to the future of the US

[http://patimes.org/poor-decision-worse-capital-
appreciation-...](http://patimes.org/poor-decision-worse-capital-appreciation-
bonds-school-districts/)

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yournemesis
That map they have in the article is pretty much worthless since it's not
weighted by state population. It pretty much resembles a population map.

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sbmassey
the main problem is putting democratically elected politicians in charge of
state finances - of course they are going to get as large an immediate payout
as possible, and not worry about the long term consequences: that is exactly
what you would expect from someone on a four year election cycle.

~~~
jasonwocky
I don't think that's true in and of itself. The election cycles have been 4
years since the founding of the country, but this level of short-term thinking
has, I think, gotten worse over time.

Personally, I think it has to do with how quickly information can be
transmitted nowadays, coupled with less trust in government than there was a
generation or two ago. But maybe I'm wrong and someone with a firmer grasp of
history can correct me by showing that this has always been a problem.

