Tobacco bonds

[e-man]

Has anyone been following this?

Basically, the billions that big tobacco was forced to pay in the landmark settlement is being paid out the states in installments over decades. Now, politicians being stupid and greedy, have sold the future revenues for pennies on the dollar to get money now. This is similar to the way powerball works. If you take payments, you get the whole amount, but you get less if you want it all at once. The state governments achieved by selling bonds that are backed by this future income, and paying interest to the bond holders. Additionally, none of the states have used any significant amount of this money to educate or reduce tobacco use as intended. Instead they have committed this money to the general budget and infrastructure, having already spent it all in most cases.


Here's where things get interesting. If the government goes after the tobacco industry too aggressively, then big tobacco won't be able to make their annual payments to the states. That means the states can't repay their bonds, and the taxpayers will be forced to cover the debt with higher taxes.


With SCHIP being enacted, and the approval of light cigarette lawsuits, tobacco companies stand to loose a lot of money. You can't make a class action settlement that bankrupts a company, so the tobacco companies will be allowed to pay out less money if their revenues fall or additional settlements are ordered.


Although they may not like that 500 pound gorilla sitting in the room, they would be committing suicide if they kill it. Since SCHIP is funded by tobacco taxes, they can't get overly aggressive and kill all tobacco sales. Of course, when has congress ever worried about spending money that doesn't exist?

Granted, most of this affects cigarette companies, but legislation tends to hit the enitre industry.

[e-man]

here's some links:

Light cigarette ruling to further sideline tobacco bonds - Forbes.com


Moody's removes NY tobacco bonds penalty on ruling | Reuters


Ten years later, tobacco deal going up in smoke - The Red Tape Chronicles - MSNBC.com

[Jonesee]

OK, where do I begin.

The sale or more accurately the securitization of an asset is not necessarily a bad thing. If the state can make an accurae prediction on the time value of money, or guess right... Then at the end of the day they are ahead of where they would have been should they have waited and recieved the funds over time. Think of taking money out of a savings account paying 2% and paying off a credit card costing you 18%...

To use your lottery analogy: In Florida you may receive 1/2 the face value of the award in cash rather than the whole value over 20 years. But the 20 year pay-out is basically an anuity set up by the state. If you take the 50% upfront, invest it at money market rates, at the end of 20 years you are ahead of the game.

The securitization transactions are completed all the time. They have been at the root of the lending crisis we fell into. Interestingly, the first article said there wasn't much interest in another securitization.

As far as the "greedy politicians", I can't see how anyone personally benefits unless they have an illegal relationship with the underwriter of the trnsaction. The transaction is likely recommended by the state comptroller's office to the governor who then approves it and the comptrollers office moves ahead. More bureaucratic than political.

My Gawd, you just made me defend a damned politician........

[e-man]

Originally Posted by Jonesee

OK, where do I begin.

The sale or more accurately the securitization of an asset is not necessarily a bad thing. If the state can make an accurae prediction on the time value of money, or guess right... Then at the end of the day they are ahead of where they would have been should they have waited and recieved the funds over time. Think of taking money out of a savings account paying 2% and paying off a credit card costing you 18%...

To use your lottery analogy: In Florida you may receive 1/2 the face value of the award in cash rather than the whole value over 20 years. But the 20 year pay-out is basically an anuity set up by the state. If you take the 50% upfront, invest it at money market rates, at the end of 20 years you are ahead of the game.

The securitization transactions are completed all the time. They have been at the root of the lending crisis we fell into. Interestingly, the first article said there wasn't much interest in another securitization.

As far as the "greedy politicians", I can't see how anyone personally benefits unless they have an illegal relationship with the underwriter of the trnsaction. The transaction is likely recommended by the state comptroller's office to the governor who then approves it and the comptrollers office moves ahead. More bureaucratic than political.

My Gawd, you just made me defend a damned politician........

I wasn't complaining about the bonds per se. Just showing what a tangled web has been made. There is no black and white. Killing big tobacco would have far reaching consequences that few people realize. I just wanted to point out a fact that few people know about. Tobacco built this country, and continues to be a big part of it's success. I think these bonds were a big part of the reason that SCHIP lowered it's tax rate from the previous version, even though there is a democratic stronghold that could have passed it in its' original form.

I stand by the stupid/greedy politician statement. As you commented, this type of unsustainable financial wrecklessness is a big factor in our failing economy. This settlement was intended to promote tobacco awareness and fund community programs to help smokers quit. Over 200 billion dollars, and not even 1% goes to the intended use? How does that help the smokers that they claim were misled by tobacco companies? Maybe not illegal, but not very honorable.

Most states didn't INVEST their lump sum as you suggest. They used it to fill their budget deficit or building infrastructure. Ohio was the only state to put any real amount towards the intended purpose. They put 1 billion into an account and ran a quit smoking campaign with the interest. But then later took that money back and put it into the general budget.