The collapse of Lehman Brothers and buyout of Merrill Lynch & Co. by Bank of America over the weekend sent shudders through New York's economy yesterday as issuers evaluated what it meant for them.
"I had hoped Lehman Brothers could be saved, along with the jobs that employ more than 12,000 people who live in the New York area," New York City Mayor Michael Bloomberg said at a news conference, referring to Lehman's filing for bankruptcy. "Lehman Brothers had provided countless New Yorkers with an opportunity to pursue the American dream, and it's a sad day for our city to see it close its doors."
The loss of two investment banks follows the collapse of Bear, Stearns & Co., which merged with JPMorgan earlier this year.
"While the full impact of these events may not be known for months or even years, the fact that financial services firms that were able to survive the Great Depression, world wars, and the Sept. 11 attacks collapsed under the weight of the current financial crisis is cause for grave concern," Gov. David Paterson said in a statement. Paterson yesterday announced the state would allow insurer American International Group Inc. to make a $20 billion transaction that required state approval in order stabilize its business.
New York state has approximately $552 million of interest rate swaps outstanding with Lehman Brothers Derivative Products, including $215 million on personal income tax bonds, $119 million of mental health bonds, and $220 million of appropriations-backed bonds. Lehman also acts as remarketing agent to $272 million of state-supported variable-rate demand bonds.
Division of Budget spokesman Matthew Anderson said terminating the swaps would cost the state an estimated $20 million but said the state was still evaluating its options in regards to both remarketing and swaps.
"We have a debt-reduction reserve fund, which has more than enough capital to finance these payments, so it wouldn't drive additional cost to the state's financial plan," Anderson said.
New York City uses Lehman as remarketing agent on $1.11 billion of VRDBs, including $875 million of New York City Transitional Finance Authority debt and $261 million of general obligation debt.
"We have plenty of interest from other firms to do that business," said deputy budget director Alan Anders. The city will choose other remarketers to take over from Lehman, he added.
The city has one swaption on $100 million of GOs with a triple-A non-terminating Lehman subsidiary that would cost $250,000 to get out of, but the city has time to evaluate its options, Anders said.
Both the Port Authority of New York and New Jersey and the New York City Water Finance Authority had used Lehman as a dealer for commercial paper.
The state's Metropolitan Transportation Authority said in a statement that it was evaluating its options and exposure to Lehman but did not elaborate beyond stating it expected it to be manageable.
Wall Street's troubles will have a financial impact on both the city's and state's finances. The state gets about 20% of its revenue from the financial sector.
Bloomberg stressed that years of conservative budgeting positioned the city to weather the storm.
"It's a crisis that we had sort of built into the budget," the mayor said. "We knew that we were going to have dramatically declining revenues from Wall Street, that has been obvious for the last six months."