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Smoking Is Bad For Your Health - Tobacco Bonds Will Kill You

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Very anecdotal but representative of the gravity of the situation we find ourselves in IMO.

The extent of abuses, corruption and the pervasive role of finance as a facilitator is under appreciated and underreported IMO. This article gives a taste of how far things have gone and how hard and costly it will be to get out of this mess.

http://www.zerohedge.com/article/smoking-bad-your-health-tobacco-bonds-will-kill-you

Smoking is bad for your health - Tobacco bonds will kill you

from zero hedge - on a long enough timeline, the survival rate for everyone drops to zero by Bruce Krasting

I think tobacco bonds are headed into the crapper. There’s about $56b of them out there. Most of that is either in retail hands or in bond funds that retail owns. This is likely to be a slow motion train wreck rather than something that explodes into the headlines one morning. But it will put a dent into some 401Ks. It already has.

By way of background on this let me diverge a bit and give you my side of the tobacco story. I knew a fellow who was a mover and shaker in one of the big US tobacco companies. Back in 1998 the tobacco companies reached what appeared to be a very harsh settlement with the states. The essence of that deal was that big tobacco would fork over a huge wad of money and the states agreed not to sue for healthcare claims. At the time the deal was inked I had a conversation with the guy. It went something like this:

BK: Man you guys took it in the ear on this one. Good-bye dividends, goodbye profits. You guys got smoked!

Lucky Strike: You have it totally wrong. This is a great deal for us. This is exactly the deal that we hoped to achieve when we started this out. It looks like we are big losers, but in fact, we are big winners.

BK: Huh? That’s not what it says in the papers. They say you will have to fork over ¼ trillion over the next few decades. How’s that such a good deal?

Lucky Strike: You have to understand, there was a real possibility that tobacco would become a controlled substance. If that had been the case we would have folded the tent in the USA. But with this settlement we are guaranteed to be in business forever, and we are shielded from liability. We made a pact with the devil. In this case, the State Treasurers are the devil.

BK: I don’t get it. Sure there is a new source of revenue for the states, but there is also the increased medical cost that goes with it. Where’s the Beef?

Lucky Strike: This deal allows the states to securitize the future revenue from this settlement. That means they can issue new bonds but they don’t have to show it in their debt profile. The tobacco settlement is just a way for the states to get off balance sheet financing. The guys on Wall Street are already ginning this up. The states can issue billions of new bonds. The current crop of “Ins” will spend it. We used the State's greed to get what we wanted.

BK: But this is all going to blow up if the states do that! Ten – Fifteen years from now this is all going to come due. What happens if they hock the future settlement proceeds and then we find that there are no proceeds?

Lucky Strike: If that were to happen it all goes Boom. But I’m retiring in five years and those that inked this deal from the states will be gone before the flameout. In the meantime, everyone is fat and happy.

BK: Oh. So that’s how things work.

Note:
A lot of readers have said that I dwell on the ‘dark side’. It’s true. Stories like this one are the reason why. It’s not nice on the dark side. But when it comes to politicians, money and Wall Street you’re safer with the dark view. You don’t get surprised as much by what happens.

Back to June of 2011 and the cracks on all this are starting to appear, Some quotes from a recent Bond Buyer story:

The payments that cigarette manufacturers make to the states are dwindling as people smoke less, posing
the latest setback to tobacco bonds.
“We saw a consumption
decline that was above and beyond our base-case expectation,
” said Aoto Kenmochi, a tobacco bond analyst at Fitch Ratings.The precipitous decline in payments threatens to leave some tobacco bonds outstanding longer than expected. In the worst cases, the withering payments
could eventually push some bonds into default
.
Fitch has downgraded dozens of tobacco deals
as the fading settlement payments have left tobacco structures with less of a cushion to tolerate further erosions.

Here a few charts on some outstanding tobacco bonds. If you want a high current yield this is for you. But beware; you may never get your principal back.

-10.png

-11.png

You can see from the pricing that these dogs have already been hit hard. More bad news is in front of these bonds.

The worst of the worst is the following. I have this on my Piece of S#*! list. Consider the insanity of this. Back in 2008 the State of Michigan borrowed $58 million. They spent this money the very next day. This is a zero coupon bond so Michigan doesn’t have to pay a penny until the maturity. The maturity was FIFTY YEARS!!!! The principal due at maturity? An unbelievable $4.4 BILLION. And there is not sufficient revenue to cover it. Note: This piece of crap is in pension fund hands. Talk about kicking a can down the road.

-12.png

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You should research on how as profits dropped in Western countries -

The B.A.T. men went on the rampage, ramping up tobacco advertising in Africa, giving away free 'ciggies' to get millions of newbies hooked (and other 3rd World countries)

You won't see much reported in Western 'Mogul' regulated Media about it.

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Breathtaking! (No pun intended.)

The zero coupon bond sold by Michigan for 58 million with a principal of 4.4 billion due in 50 years is just astounding. Someone's pension is going to be disappointing...though I bet nice bonuses will have been paid.

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Breathtaking! (No pun intended.)

The zero coupon bond sold by Michigan for 58 million with a principal of 4.4 billion due in 50 years is just astounding. Someone's pension is going to be disappointing...though I bet nice bonuses will have been paid.

Greece springs to mind. I can't help but wonder if these absurd schemes were systemic rather than exceptions.

Edited by _w_

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Greece springs to mind. I can't help but wonder if these absurd schemes were systemic rather than exceptions.

I expect they are. I remember reading a few years ago about some of the cr*p stuffed into the Japanese banks 20 years ago that, whilst not as insane as this, was certainly dodgy.

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A long term view needs to be taken on these sort of frauds.

Go back to the paper work, find the bankers involved, and then cease their assets, and any assets they have passed down or transfered to relatives or family.

+100

Problem is most of it is probably legal (if not ethical).

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  • 284 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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