I’ve got a question, when financial types use the word “yield” aren’t they usually referring to the profit they’re making on an investment?
Here’s Mayor Jerry Sanders in a press release yesterday talking about the city’s just-inked deal to borrow $100 million from Wall Street. The city will have to pay an interest rate of 7.125 percent. But here’s how Jerry describes it:
The yield of 7.125% compares very favorably with a similar transaction that occurred May 11th in which the State of Michigan, a much larger government entity selling a significantly greater number of bonds, received a yield of 7.3%.
Regardless of the word, he’s putting glossy lipstick on a very stinky pig.
Look at the facts. The city will, by next week, borrow $100 million total from Wall Street. Once it receives that $100 million – minus, of course, the fat fees and commissions we have to pay consultants – it will wire it over to the beleaguered retirement fund. The retirement system will then invest it. The city will pay off the loan by handing over all the money it receives from the massive tobacco settlements for at least the next two decades.
Why do this? In the infinite wisdom of the city of San Diego, you can borrow money at high rates like this and invest it and everything turns out peachy because investments never lose money. Risk? Bah! When was the last time an investment lost money?
In other words, it’d be like me getting a new credit card that allows me to borrow a lot of money at an introductory rate of 7.125 percent. I go to the ATM, take out as much as it will let me, and head straight to my E-Trade account and start investing. Why? I’m bound to earn more than 7.125 percent, right? What kind of investing wimp can’t do that?
Now, of course, if Wifey comes home and sees what I’m doing, she’d probably unplug the computer and swear a little bit. Apparently using debt to invest isn’t practical to her. And she’s probably right, for most people who don’t know how to game the market like I do.
But city officials will say that this is nothing like what they’re doing.
The pension system would never use E-Trade. They pay people who are much better than that.