Five Reasons You'll see Chris Christie at the Hamburg Inn No. 2 this fall

Timing

President Obama is beatable. Now.  The President’s numbers are at an all-time low, ranging from 39 to 47 percent approval.  He’s upside down with a year to go and an economy that’s proved to be as stubborn as Camden Democrats trying to keep their guy on the ballot. Other GOP luminaries are on the sidelines so for Christie, this likely is a once in a lifetime shot. He can win, which based on the disarray that’s overtaken the Republican field, is not something any of the others can say with a straight face, at least not right now.

The map

When the GOP crowed that it had been preparing for the latest round of legislative redistricting for more than a year, the party fully expected to come out on top, handing control of at least one house to the governor and easing his last two years in office considerably.  But best laid plans and all that.  When Alan Rosenthal cast his lot with the Democratic map, it all but assured the left control of the Legislature for at least the remainder of Christie’s first term and possibly for all of his second should he win one.  With both houses in enemy hands, the governor’s agenda will no doubt suffer, giving him good reason to jump ship and try his hand on the national scene.

Four years is an eternity

While Christie has ruled out running in the current cycle, he has left open the door to a possible 2016 run.  But in politics today’s darling is tomorrow’s old maid.  There are any number of things that can happen that would derail a Christie 2016 bid, not the least of which would be a GOP win in 2012.  But even should Obama win – a prospect the GOP would view as a disaster - in those intervening four years, Christie would need to survive re-election and continue to batter Democrats while remaining unscathed in the process.  Can he do it?  Sure.  Is it likely?

Dollars and sense

There are millions out there poised to pour in the second Christie gives the word that he’s in.  Major fundraisers and bundlers, unhappy with the current field, have hung on tight to their cash and their magic money lists in hopes the big man will come around.  If and when he does, look for the governor to sit Daffy Duck like atop a mountain of treasure waiting to be spent.

The field

Quite simply, Christie is good.   How good?

Several months ago, Christie faced one of the few bumps in his otherwise smooth first 18 months in office.  Ally Joe DiVincenzo was just outed by PolitickerNJ for retiring from his position as Essex County Executive and continuing both to serve in the role and collect a pension.  PolitickerNJ had just run another piece on Lou Goetting, a member of the governor’s inner circle who collected both a pension and a salary from the state, and the Star Ledger had just run a front-page piece on legislators taking Christie to task for his tepid response to Joe D.  A reporter asked the governor to explain why it was OK for Goetting to bring in nearly $200,000 from the state, but not OK for others in the system to double dip and hold dual offices.

Christie grabbed the question and ran.  In the course of his two-minute answer he backed Goetting unquestionably, calling him the MVP of the administration’s budget team,  took a lighthearted jab at Statehouse Press Corp. Dean Michael Aron’s age, chided the Star Ledger for going easy on Democrats even while it lambasted him, and uttered the now infamous “take out the bat” rejoinder to state Sen. Loretta Weinberg’s criticisms.  When he was done, he spotted Lt. Gov. Kim Guadagno in the room and announced it was the LG’s birthday, leading members of the press corps in a round of “Happy Birthday” before exiting the press conference.  Members of the press (myself included)  walked out amazed at what we’d just seen.

Oh yeah.  Did you see Rick Perry’s last debate performance?

Christie also brings something to the field that is so far absent and that’s gravitas with a side of everyman appeal.  Christie’s brand of conservatism can play in the Northeast, where the in-your-face religion wielded by Rick Perry and Michelle Bachmann scares some moderates.

Five Reasons You'll See Christie at the Tick Tock Diner Next Year

The grind

Running for president is all consuming.  It’s a year- long cavity search as voters and the media try to figure out if he has what it takes to run the country.  Old baggage, long since stored in the proverbial attic, is spiffed up to look new and new baggage is trotted out to the showroom floor on a regular basis.  Christie is fast on his feet and rarely makes a glaring misstep, but it’s unlikely reporters on the presidential trail will settle for “get a life” as a response to their questions.

His health

Christie has shown no signs that he has health issues, but earlier this year he caused a ripple in the national press when he was taken to the hospital with an asthma attack, bypassing a scheduled press conference.  He spent the day in the hospital, emerging early in the evening to say he was fine.  Do that once on the campaign trail and supporters will empathize. Do it twice and they’ll worry they’re about to elect a time bomb.  Christie has spent 10 years in high-profile, high-stress jobs and as much as it's Un-PC to acknowledge his weight, it's hard to overlook the toll a campaign - not to mention at least four years in the most intense job in the nation should he win - will take.

Kim Guadagno

Christie has delivered the long-suffering GOP from purgatory during his almost two years in office. The party has become relevant again after nearly a decade and there is no doubt in anyone’s mind that Christie now sets the tone in Trenton.  Should he run for president, at the very least Guadagno would be his stand-in anytime he’s out campaigning.  At worst, the governor would resign his seat to focus full time on the campaign, leaving Guadagno at the helm of not just the state, but the party.  For all her strengths – and let’s be honest, it’s tough to tell what they are because she hasn’t exactly been on display for the past two years - Guadagno is no Christie.  Leaving now would threaten Republicans with banishment and who knows if there is another Christie waiting in the wings.

Desire

During his appearance last week with Indiana Gov. Mitch Daniels, Christie painted a bleak picture of the campaign trail, describing a frigid morning in Iowa as he heads off to shake hands at a meat packing plant – hardly the talk of a man champing at the bit to hit the road.  He went on to say that running for the presidency is not only something you have to want to do more than anything else, but also something you must feel you have to do.  “And for me the answer to that was it isn’t,” Christie told the audience.

Christie is a devoted family man - so devoted that he took what he had to know would be a shot to his reformer credibility by taking a State Police helicopter to watch his son play baseball - and exposing his children to the blinding spotlight of first the campaign trail and potentially  the White House seems out of character.

The Jersey Guy

The tough guy appeal that Christie wears as a badge of honor when touring the state and even the country works.  People respond to it and Christie plays to it.  But it works in part because it’s expected of a former prosecutor trying to clean up a state he thinks has gone to seed.  Whether it works on the national stage, in places like Iowa and Kansas where Solomon Dwek and Tony Soprano are not  household names and voters are looking for someone to empathize with their plight - be it farm subsidies or poverty, remains to be seen.

In all, the agency has paid Wall Street banks more than $37 million since 2007 to cover the three swaps, which currently have a market value of approximately negative $145 million.  When combined with other swaps the agency has paid to terminate over the past two years, the total swaps payout crests $70 million since 2007.

The swaps are basically an exchange of a fixed payment by the PA for a variable one from a counterparty tied to a short term interest rate.  The derivatives, which are essentially a bet with another company on which way interest rates will move, are meant to protect the PA in the event that interest rates soar.  When used as a hedge, a swap is designed to lock in a low fixed rate payment to offset the long term risk of a variable rate bond.  The variable rate payment paid by the counter party is designed to track the rate paid by the PA on the bonds, offsetting each other and mitigating the risk of soaring rates.

When no underlying bond is issued, the swaps become a pure bet on rates. When interest rates are high as they were in 2006 when the deal was cut, the PA stands to break even or make money on the swaps.  But, when rates go in the tank, the fixed payments the PA is forced to make far outweigh the variable payment it receives.

In June 2006, when all three swaps were made, the short-term rate on which the swaps are based – known as the London Interbank Offered Rate or LIBOR - stood at over 5.5 percent.  Today that rate is .29 percent.

The swaps, which have a face value of $647 million, were entered into by the PA at a time when interest rates were on the rise and public finance professionals across the nation were looking for ways to lock in lower rates on future bond issues.

In the case of the PA, two swaps were entered into in anticipation of the issuance two years later of variable rate bonds and a third to hedge a variable rate bond issued that year.

When tied to a variable rate bond offering, the swap is meant to protected the issuer against a spike in interest rates, in effect, creating a low fixed rate payment instead of a fluctuating one.

But officials miscalculated the financial picture as the effective date of the swaps coincided directly with the latest recession, which has forced interest rates down to levels never seen before.  As a result, the underlying bonds were never issued on two of the swaps and the PA has been forced to pay out millions to the counterparty banks. The third bond issue was retired in 2008, but the swap, which had plummeted in value, remained on the books.

In addition to the losses, the PA was forced to pay interset on its variable rate bonds that was higher than it would have had it not hedged the offering with the swap.

At current interest rates, the PA will pay out $27.7 million more per year than it takes in on the swaps.  But canceling the contracts would cost far more – upwards of $140 million at current market value - leaving the PA little choice but to ride the wave and hope interest rates begin to climb.

Losing from the start

Port Authority financial statements show within months of their inception, the market value of the swaps had dropped to negative $23.4 million.  The following year the market value fell to negative $42 million as interest rates continued to plummet.

In 2008, the year the PA was supposed to issue the underlying bonds on two of the swaps, interest rates were at half their 2006 levels and the value of the swaps had dropped to negative $197 million.  That year’s financial statement reflects the PA’s concern over the unhedged swaps.

“The Port Authority continues to monitor all three swaps… to determine possible actions to take when market conditions are more favorable,” The 2008 statement said.

In the second quarter of 2009, the Port Authority amended the three unhedged swap agreements to defer interest rate payments until the last quarter of 2010. That agreement included an increase in the fixed rate paid by the PA, upping its annual payout by $3.2 million.  The variable rate payback was also changed

Payments began again in October.  Since then, the PA has paid out more than $22 million.

The PA also has paid an additional $31 million in the past two years to cancel out two swaps entered into in the early 1990s.  Those swaps called for much higher interest rates and were terminated when the bonds they were meant to hedge were refunded.

In addition to the payouts, the PA has paid nearly $800,000 in advisory fees in connection with the three unhedged swaps on the books, putting its total five-year payout on the derivatives at more than $70 million.

“A certain arrogance associated with swaps”

Robert Brooks, a finance professor at the University of Alabama and author of a book on swaps, said the PA was essentially gambling with the public’s money and lost.

“There is a certain arrogance associated with swaps because you are saying you can tell what is going to happen in the future,” Brooks said.  “But we know that generally you can’t predict and things happen that have never happened before.”

Brooks said swaps are entered into as a hedge; however there is tremendous downside to the agreements as the PA and hundreds of other government entities have discovered in recent years.  Managing risk is about preparing for what comes your way, not betting on the future.

“They should be managing their risk the same way these investment banks on the other end of the swaps do,” he said.  “They don’t manage their risk this way.”

Swap experts stress that a market value is simply a snapshot of the swap at a given time.  Over its life, a given swap could turn out to be a solid investment and swaps are not inherently bad under the right circumstances and with the right knowledge of the product.

A spokesman for the PA said the agency has used swaps “very conservatively” and continues to watch the three unhedged derivatives on its books.  The PA has no plans to enter into further swaps “at this time.”

“With the deterioration of the variable rate debt market, swaps would not be used to fix interest rates in refunding,” said Port Authority spokesman Ron Marsico. “Therefore, at this time, the Port Authority does not intend to enter into any further swap transactions. The last swap was entered into in June 2006.”

The swaps were part of the reasoning used in March when Moody’s Investor Service changed the PA’s credit outlook to negative.  That outlook has been used as one justification for the massive toll hike approved by the PA last week.

Beginning next month, cars will pay an additional $1.50 to cross the Hudson and PATH riders will pay an extra 25 cents per ride.  Tolls will rise another $3 by 2015 and the PATH fare will jump another 75 cents.

In all, the PA expects to collect an additional $100 million in 2011, $375 million in 2012, $575 million in 2013, $725 million in 2014 and $900 million in 2015.

In his statement last week before the board voted in favor of the toll hike, PA Chairman David Samson blamed the need for the hike on bad economic climates, the $11 billion resurrection of the World Trade Center (and other infrastructure projects), and the heightened need for security investments in the region.

PANYNJ not alone

The Port Authority is not alone in its usage of swaps as an interest rate hedge.  Earlier this decade, New Jersey entered into dozens of risky swap deals and has paid millions to untangle them.  Governments around the nation have also partaken heavily in the derivatives market, many with little understanding of what they were committing to.

With credit markets booming and interest rates seemingly on the perpetual rise, Wall Street financiers approached municipalities, pension funds and other government agencies with a deal: We’ll cut your borrowing costs while at the same time protect you against soaring rates.  The catch? There was no hedge against losses should interest rates crater.

The result, according to a study by Bloomberg,  is that swap deals have cost governments across the country some $400 billion.

In New Jersey, the state still has 27 swap deals on its books, with an estimated market value in January of negative $400 million.  Earlier this year, New Jersey paid more than $122 million to partially terminate eight of its swaps.