WSJ headlines and questions for February 23 2011

WSJ headlines and questions for February 23 2011 -...

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WSJ headlines and questions February 23, 2011. WSJ Headline February 16. Banks Go Straight to Public Borrowers. Banks are setting aside billions of dollars to do something that until recently was rarely heard of: making big loans to cities, states, schools and other public borrowers that otherwise might have turned to the bond market. The loans are often many millions of dollars for capital projects from a single bank, such as Riverside, CA’s $25 million loan from City National Bank in Los Angeles to expand its performing arts center. Key differences from large loans to corporations are that the big corporate loans are often syndicated (shared among many banks) and can be sold in secondary markets. There is currently no secondary market for municipal loans. Municipalities like this new method of borrowing because they save on bond
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Unformatted text preview: underwriting costs and the loans are typically at lower interest rates than the bonds. Analysts say that in the event of bankruptcy, the banks would not have priority they would be treated equally with the bondholders. Questions: 1. Why are banks suddenly going into this type of lending? 2. Why are the banks charging lower interest rates than bond holders? 3. What about credit risk? Do these seem like relatively safe or risky loans? When they lend at rates like 3.85% (an example in the article), are they charging enough to cover the credit risk? 4. What is the difference in credit risk between a direct loan to a municipality and a letter of credit (a type of loan commitment) backing a bond issue of the same municipality? 5. What do these loans imply for bank liquidity? 6. Does this seem like a good idea overall?...
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