Bridging bridge loans

Posted on July 14, 2011 by

The economic news of the day is farcical. California is looking to get a bridge loan to cover payments of its bridge loan. No, I’m not making this up. California is not Greece… geographically speaking.

Proceeds from the loan would be used to help pay the state’s bills until Lockyer can sell an estimated $5 billion of so-called revenue-anticipation notes, or RANs, scheduled for late August. Without those notes, the state could run out of cash as it did in 2009, when it issued $2.6 billion of IOUs…

California has used bridge loans before. It borrowed $6.7 billion from JPMorgan Chase & Co. and five other banks in October when a record 100-day budget impasse prevented Lockyer from issuing RANs. The state paid 1.4 percent on the loan, which was repaid when Lockyer sold $10 billion of RANs at the end of November. The state took out a similar $1.5 billion bridge loan in August 2009 after an impasse then forced the state to issue IOUs to pay bills.

The new bridge loan would be repaid by the RANs, which the state would pay off when the bulk of taxes is collected later in the year.

This is the equivalent of writing forward-dated checks based upon the anticipation of a new credit card that will pay off your old credit card that will be paid off when your paycheck comes in. Or something like that. No, they’re not broke. Everything is fine. Nothing to see here. Keep on moving, folks.

(H/T goes to ZH, of course.)