California Will Default On Debt: Christopher Whalen (VIDEO)

California will default on its debt, bank analyst Christopher Whalen said. And if it accepts a Federal bailout, he added, other states will follow.

Whalen, managing director of Institutional Risk Analytics, who recently called the mortgage crisis a "cancer," told Business Insider's Henry Blodget that a California default is imminent (hat tip to The Big Picture).

The state, saddled with a $25.4 billion deficit, and with a reputation for taking an unusually long time to pass a budget, also faces a massive pension obligation, which some estimates place around half a trillion dollars. The looming question, Whalen said, is how the Federal government will react to a state default.

"I think they're gonna default first, and then I think you're gonna see some kind of Federal workaround. Because obviously a default by a sovereign state, within our Federal system, is going to hurt the credit rating of the United States," Whalen said.

The Federal government, Whalen noted, cannot force a state to accept a bailout. Indeed, state defaults are extremely rare -- the last one happened during the Great Depression, when Arkansas couldn't meet its debt payments. Most states, including California, are constitutionally required to balance their budgets.

Whalen said a California default would have enormous implications for the rest of the country.

"This is not just a California issue. This is a Federalist crisis for the United States," he said. "If there's even a hint of a bailout, you're gonna have Illinois, New York, several other states right behind California."

At The Economist's Buttonwood Gathering last month in New York City, an all-star panel, including Robert Rubin, Laura Tyson, and Joshua Bolten, simulated for an audience a Federal government response to a fictional state's ("New Jefferson") default.

For the most part, the actors were able to stay in character -- until Tyson accidentally referred to New Jefferson as "California."

WATCH Whalen's interview below:

Comments

[luckyone77]

08:19 PM on 12/15/2010

If California defaults, we will not be able to get enough credit to continue the wars. Maybe that would be a good thing

[Jimminynix]

05:57 PM on 11/25/2010

Pensions.... (like that expression "Location, Location, Location") Pension obligations for public employees (Cops, Prison Guards, etc...) are going to take down so many; small, medium, large, and in the case of California, HUGE budgets all across this Nation. We chose to create a police-state Nation so we have to deal with it. (not just California)

[chaz]

02:16 PM on 11/19/2010

Bush, the gift that keeps on giving. First Wall Street,then the Auto Industry and now all fifty states need to be bailed out.
Moral of the story.
If you keep electing Republicans they will continue to deregulate (Reaganomics) and we will continue to go broke.

[George Hanshaw]

01:45 AM on 11/19/2010

California is going under. They have kicked thetheir existing debt is driving their can down the road for the last time. They have the worst bond rating of any of the 50 states, and therefore are paying higher debt-service costs than anyone else. They have entered the 'death-spiral' phase of economics, where their current debt costs are going up more and more as they become less and less solvent. Pretty soon, even their tax-free bonds will be selling at junk bond yields.

California’s latest spate of borrowing – it is the largest issuer of state debt in the US – started a week after news of new projected budget deficits of more than $25 billion in this fiscal year and the next

The state on Wednesday said it would cut the size of a sale of traditional tax-exempt bonds by $750 million to $1 billion, shifting the borrowing to a planned sale of taxable debt, which will price on Friday. Of the $2.75 billion of taxable debt it is now selling, some $2.5 billion will be BABs. The tax-exempt bonds price next week.

Tom Dresslar, spokesman for Bill Lockyer, the state treasurer, said the tax-exempt municipal bond market was a “a cold, cold world right now for issuers and taxpayers”.

http://www.cnbc.com/id/40249849

[henrypapillon]

10:36 PM on 11/18/2010

There will be no Federal bailout. The Republicans won't allow it. and a Republican governor shouldn't need it!

[luckyone77]

08:21 PM on 12/15/2010

Jerry Brown is governor elect. I'm sure he'll accept it.

[mmike1969]

07:14 PM on 11/18/2010

Start raising taxes NOW! Start cutting services NOW! Oh, wait, california does not want high taxes and does not want services cut...:p

[MrUnlimited]

07:44 PM on 11/18/2010

Lol, at this point I don't know what it'll take for Californians to realize that things need to change.

[hrpmap]

11:20 PM on 11/18/2010

They haven't learned so far, they voted for the same cast of characters that put them where they are.

[luckyone77]

08:22 PM on 12/15/2010

Like overturning prop 13 that froze property taxes at 1970s levels

[betrayed1]

04:51 PM on 11/18/2010

There is nothing preventing the Fed from simply bailing out California by buying it's bonds. They bailed out the banks, why not California?

http://www.youtube.com/watch_popup?v=PTUY16CkS-k&feature

[MrUnlimited]

07:45 PM on 11/18/2010

Based on the above article, the Feds might fear that such an action would prompt other financially irresponsible states to follow suit by asking for a similar bailout.

[miketg]

01:14 AM on 11/19/2010

Not sure I want my tax dollars going to CA in a bail out. The state's political leaders have been woefully negligent in their fiscal management. They should work out the problem themselves. That way, the citizens who voted them into office can hold them accountable. We can't do that from out of state.

[dbawden]

01:25 PM on 11/18/2010

As I recall, a proposition froze property taxes and a constitutional amendment required a super majority to raise taxes supposedly to reign in spending. A republican minority effectively blocked for decades raising taxes and/or passing budgets. Their present financial state has resulted from this gridlock.

What I'm curious to know is "so what happens next?" California starts taxing more and spending less, pays a high percentage on its bonds, lays off tons of state employees, cuts services, cuts pension benefits, sells off its assets to private investors, etc. Kind of like what the EU is requiring of Greece. Is that where this is headed?

[Steven Covey]

02:45 PM on 11/19/2010

They sell off all of the state property to a group from Orange County and Texas, then lease it back with guaranteed lease forever. Reminds me of Enron.. 3 Republicans to 2 Democrats in that vote so the Republican Governor can sell it all off....

[Scott Hermann]

03:21 AM on 11/20/2010

Not exactly. CA passed prop13 which doesn't freeze property taxes. Just limits how fast they can go up. We had elderly literally forced to sell their homes due to the insane level of taxation.

Next. While it is true CA now only needs a majority to pass its budget, another proposition reaffirmed the two thirds requirement to raise taxes.

[olephart]

12:08 PM on 11/18/2010

Why don't they just sell their houses back and forth to one another at ever increasing prices and spend the difference. That should generate enough revenue to balance the budget.

[guveqzero]

05:42 AM on 11/18/2010

Time for California to leave the Union. As the largest contributor to the US economy and federal money, it gets no representation in Washington on California issues. We will become the 7th largest economy on earth, will stop our personal spending on needless wars, will stop the funding of the bank vultures, and finally clean up the mess of Washington DC politicians.

[blueken]

11:41 AM on 11/18/2010

Well, if you should leave the Union, good luck defending yourself from a Chinese invasion. By the way, for those Huffpost readers that are pro term limits, Calif has term limits.

[guveqzero]

01:08 PM on 11/18/2010

I am ready.

[Scott Hermann]

03:25 AM on 11/20/2010

Term limits have been a nightmare. 1500 bills passed each year. Nobody reads them. Rather they are just pushed through to pad resume for the next election and next position they will seek. Its disgraceful.

[ConservativeWorld]

01:17 AM on 11/18/2010

This is a foregone conclusion. I say let California go bankrupt and no bailout. Let them raise taxes to 15% or 40% for all I care. The Libs have ran the state into the ground. But at least they have Moonbeam and Boxer....

[guveqzero]

05:32 AM on 11/18/2010

I'd like to get tough as well, raise taxes on the rich to 90%. Pretty soon, every state do the same. Then, the rich will be paying their fair share. When you game the system, be prepared for a little wrath now and then.

[TruEngineHearing]

10:17 AM on 11/18/2010

"ConservativeWorld" is life at dirt level, and this guy lives it spewing bile with his tongue and a dictionary. Not even worth a listen. The failure of California is a sad event, not something to enjoy and celebrate. A better life that we all want is possible for mankind, but certainly not with lesser souls and weak players like "ConservativeWorld" dropping boat-anchors off the ship of state, and lying about the wind.

[Scott Hermann]

03:30 AM on 11/20/2010

Already leaving CA. 150 corporations this year alone taking their jobs with them. High income is mobile

[henrypapillon]

10:40 PM on 11/18/2010

Uh, as one of the Seven Dwarfs, Dopey, you above all should know that a Hollywood personality, another one of those Republican Hollywood personalities , Ahnold, is the Guvenator of Collie Fornia. But if you had taken my advice and got the upper part of your anatomy dislodged from the lower part of your anatomy, you would have been able to see and you would  have known this.

[spiralskydancer]

11:02 PM on 11/17/2010

greetings....the time for speculation is over.....enough of pros and cons.....compromise is off the table...bi-partisan has left the stadium......LET'S GET READY TO RUMBLE.....eh?.....

[Iam12Vote]

10:57 PM on 11/17/2010

Republicans killed immigration reform under Bush and oppose it under Obama. But the Federal government "nationalized" California's Nat'l guard to secure the border, then sent California the bill for their services. The mortgage crisis has caused a tsunami of foreclosures in the state...and California got to chip in to bail out the banks. Enron took 8 billion dollars in a colossal swindle and Washington let State taxpayers eat it. The state pays more than it gets in Federal dollars while other states cut taxes.

Wake up Washington. Your golden goose is on life support.

[Tom95134]

10:45 PM on 11/17/2010

The simple solution is for California to cede from the Union and then operate as a sovereign nation. They might even be able to be annexed to Mexico. Of course it would be better if California joined with some other states such as Washington and Oregon and then apply to Canada to become part of Canada. Maybe New York could applied for annexation to either Ontario. Just think, New York, Ohio, and Michigan being annexed to Ontario.

[Iam12Vote]

10:51 PM on 11/17/2010

There were ideas floated for a pacific republic before California joined the Union. Seems the State was caught up in arguments by "special interests" in the east...something about spreading slavery.

[Eileenla]

10:42 PM on 11/17/2010

If California was a nation it would have the fifth largest economy in the world. To assume our state's problems are local issues is to miss the enormous impact California's industry, agriculture and federal tax revenue has on the entire country. We get much less from the federal government than what we pay in...lat figure I heard was we receive a dollar in federal funding for every $1.78 we contribute. Our tax revenue goes to support states that are poorer and need higher federal assistance than we've needed in years past. For the government to allow the state to fail during the deepest recession we've experienced since the depression would be insane. If it occurred, my recommendation would be for California to secede from the union and keep all its tax revenues to balance its own budget. We could also print our own currency unencumbered by the Fed and its debt structure. Not a bad solution for a populous, diverse and resource richnstate that has traditionally been ignored by Washington.