The natural gas that cooks the food on Main Street USA was one of the many things that Wall Street bought and sold with borrowed money. The gas deal went belly-up in September, costing investors $700 million when Lehman Bros. failed. Now, it will cost more for Disney to light the flame to roast the chicken to feed the children at the Crystal Palace.
Wall Street's financial crisis flows to Main Street in unexpected and sometimes imperceptible ways. The same bum deal that will raise Disney's natural-gas costs will make it more expensive to buy electricity for residents on Main Street in Tallahassee.
It also cut the value of a dozen mutual funds that lent the money for the deal. And it put a team of bankruptcy lawyers to work in New York and Atlanta.
The tale of Main Street Natural Gas — the sponsor of the obscure financial deal that failed — reveals how risky investments flourished in an era of easy credit and how everyday people are now paying the price.
It's a story of how $700 million was vaporized in just a few months, and of how the deal's investment bankers got paid while investors and consumers got stiffed.
"I feel badly about the investors who lost money and about losing a cheap supply of natural gas," says Arthur Corbin, chief executive of Main Street Natural Gas of Kennesaw, Ga.
The financial system is staggering under the weight of Wall Street-manufactured debt that cannot be repaid.
Main Street Natural Gas' $700 million is a small but revealing part of that problem. Losses on home mortgages alone will reach $1.4 trillion, the International Monetary Fund estimates. Financial institutions are suffering additional losses on home equity loans, student loans, credit cards and other debt.
The details can seem complex when buried in the language of finance — leverage, derivatives, credit default swaps.
Yet, at the core, the deals were simple: Banks and investors borrowed trillions of dollars and bet the money — on home values, natural-gas prices, the probability of bond defaults.
Main Street Natural Gas was typical. It put none of its own money into the $700 million deal. Every penny was borrowed, even the millions paid to the investment bankers. Main Street Natural Gas will lose nothing in the failed transaction.
Instead, the lenders — mutual funds, insurance companies, individual investors — will take the hit.
Long-term promises
Main Street Natural Gas is part of the Municipal Gas Authority of Georgia, a government agency established by the Georgia Legislature 20 years ago to buy natural gas for city-owned utilities that now serve 243,000 customers.
A few years ago, investment bankers from several Wall Street firms approached the authority with a plan to help the agency lock in cheap supplies of natural gas for decades.
The idea: Borrow money at low, tax-exempt interest rates available to government and give the money to the investment banks. The banks would use this inexpensive debt to invest for a profit and, in return, supply natural gas at a below-market price.
In November 2006, the Municipal Gas Authority of Georgia set up Main Street Natural Gas as a non-profit corporation to do the Wall Street deals.
Main Street's sole purpose was to borrow money to buy natural-gas derivatives — contracts that bet on the future price of natural gas.
"A bond lawyer suggested naming the company after 'Main Street' because that's who we were serving," says Corbin, who is also chief executive of the Municipal Gas Authority.
The goal was to secure an inexpensive, long-term natural-gas supply for 73 municipal-owned utilities, including the government district that serves Disney World.
In April, Main Street borrowed $700 million and gave it to the Lehman investment bank. In return, Lehman promised to arrange delivery of 160 billion cubic feet of natural gas over 30 years at a below-market price.
That's like a taxi driver borrowing $7,000 and giving it to a man who promises to supply gasoline for the next 30 years at 50 cents per gallon less than the market price.
The long-term savings would be huge — if the fellow who got the cash doesn't go out of business.
Lehman filed for bankruptcy Sept. 15, having delivered less than 1% of the promised gas.
No comments:
Post a Comment