Washed It!

General Motors said Thursday that a group representing many of its largest bondholders had accepted a proposal offering up to a 25 percent stake in exchange for not opposing G.M.’s bankruptcy reorganization plan.

In a regulatory filing, G.M. also filled out many of the details of the reorganization plan, crafted under the eye of the Treasury Department.

G.M. confirmed that the government would provide more than $50 billion in bankruptcy financing to see the company through its Chapter 11 filing. What will emerge, through an asset sale known as a 363 transaction, is a newer, slimmer G.M. with about $17 billion in debt.

Under the terms of the deal, G.M. would sell itself in Chapter 11 and bondholders would receive a 10 percent stake in the newly reorganized company in exchange for about $27 billion in bonds. They would also receive warrants to buy an additional 15 percent of a new G.M., exercisable if G.M.’s value rises to certain levels.

G.M. said in the regulatory filing that the proposal depends on the government getting enough bondholders to make statements of support backing the terms of the swap. Without those statements, which are due by Saturday, the amount of stock and warrants for bondholders would be “substantially reduced or eliminated.”

The bondholder committee, which represents holders of about 20 percent of the bonds’ value, had already said they support the proposal, G.M. said.

Advertisement–> Exchange Hosting | TF2 Hacks | HIPAA Email

“The ad hoc committee of G.M. bondholders supports the revised offer from G.M. and believes that when contrasted with the alternative — uncertain and costly bankruptcy court litigation — that it represents the best alternative for bondholders in the current difficult and dire situation,” the group said Thursday in a statement.

Earlier this week, bondholders overwhelmingly rejected a debt exchange offer that would have swapped their bonds for 10 percent of the company’s equity. It is believed that G.M.’s bonds are held by tens of thousands of investors, ranging from institutions to individuals.

Thursday’s announcement came after German and American negotiators in Britain failed to agree on a crucial bridge loan to sustain Opel and the rest of the European operations of General Motors in the event of a bankruptcy filing, following a marathon negotiating session that stretched till nearly 5 a.m. Thursday.

But officials did manage to narrow the field of potential suitors for Opel to two companies — Fiat, the Italian automaker, and Magna, a Canadian auto parts giant. A Belgian private equity firm as well as a Chinese automaker were knocked out of contention.

NY Times

Mises Daily by Karen De Coster | Posted on 5/22/2009

The last remnants of the American free-market system are experiencing a quick death by strangulation. Perhaps the most disturbing casualties of government intervention are General Motors and Chrysler, two disgraced automakers that have gone from private ownership to the public trough virtually overnight. The US government has effectively grabbed a financial stake in each company while attempting to control the reorganization process without any constitutional authority to commence such actions.

The takeovers, which have occurred at breakneck speed, are alarming. A defining characteristic of economic fascism is the control of private property and business through a government-business “partnership.” This public-private alliance, while permitting private business ownership, is an arrangement that allows government to control and plan private industry. What we are experiencing from the schemers in Washington, DC is a planned capitalism, or soft fascism, that is being rolled out at an unprecedented pace.

One of the more disturbing actions on the part of the Washington establishment has been the blatant disregard for property and contract rights. First, consider the case of Chrysler. The government, while coming to the aid of a dying Chrysler, lobbed offers to its lenders, the bondholders. A group of dissident bondholders spurned the government’s offer that would have given them a minuscule stake in the company while the UAW received a majority ownership position.

In response, the president denounced the bondholders, publicly proclaiming their obligation to sacrifice and referring to them as “vultures” because they insisted on maintaining their rights as senior creditors. Chrysler’s bondholders, by law, are secured creditors, and they hold a senior ranking above unsecured creditors or shareholders in a bankruptcy or reorganization. Yet they were vilified and bullied for refusing to agree to a shoddy deal. Some of the holdout bondholders finally did buckle under; they dropped their legal challenge and agreed to the government’s lowball offer, but only because they were strong-armed by Washington’s bully tactics. Thomas Lauria, the attorney representing the group, stated that his clients weren’t able to “withstand the enormous pressure and machinery of the US government.” Thus the senior creditors were plundered while ownership was redistributed to the UAW, whose members are junior creditors. This makes a mockery of US securities law.

The bailout and ensuing appropriation of General Motors is no less tragic. The current restructuring plan calls for the US Treasury Department to have controlling interest in General Motors, which amounts to absolute nationalization. In GM’s headquarters in Detroit there is a cluster of bureaucrats from the government’s task force telling GM how to run its business. The task force, assembled by the White House, has the power to exercise significant control over product decisions. According to a GM news release, the Treasury Department will have the power to elect all of GM’s directors and control the vote on matters brought before the stockholders. Additionally, the bondholders who have funded the company are being offered a paltry piece of the equity of the reorganized company — another major blow against the sanctity of contract.

Advertisements–> SEO Hosting | TF2 Hacks | Exchange Hosting

Furthermore, the White House fired General Motors Chairman and CEO Rick Wagoner. When the executive branch intervenes in a private business and ousts management, bailout or not, it is a staggering violation of the American ideal of free enterprise. This sets a precedent for unlimited government trampling over the private sector. On March 30th, Obama said, “Let me be clear. The United States government has no interest in running GM. We have no intention of running GM.” If that’s the case — and we know it’s not — then why scoop up majority ownership?

The revolving door between Wall Street and the bowels of Washington are getting a workout. It’s the guys from Wall Street who run the government and the guys from government who run Wall Street. Only the guys from Wall Street – especially Goldman Sachs – who have taken over the Treasury Department are now taking over control of the domestic auto industry. You know what happened when they tried to run their own company, Goldman Sachs. How in the heck did I miss the part in the Constitution where powers were granted to the Treasury Department and its hired hacks?

Another notable abomination is the use of taxpayer dollars, on the part of the political establishment, to grant preferential treatment to one group of constituents — the unions — at the expense of each company’s creditors, the bondholders. Not only is this an illicit use of the executive office for political pandering, it’s a deliberate redistribution of wealth. It’s also a handsome payoff to the loyal unions, who have long been big supporters of the Democratic Party.

The GM and Chrysler takeovers are orchestrated political restructurings aimed at serving the larger interests of the US government. The apparatchiks on the Potomac have the authority to coordinate production in a manner that compliments their political and social agenda. The White House has not been shy about its ambitions for green policy and the future of American-made automobiles. This coup paves the way for big government to get its tentacles into an industry that will allow the feds to ram their socialist-totalitarian, green agenda down all of our throats.

Moreover, the Obama regime already announced that it is buying 17,600 green vehicles (hybrid sedans) from Detroit’s Big Three by June 1, using $285 million from the $787 billion stimulus bill. Representative Sander Levin, a Democrat from Michigan, stated, “The federal government’s purchase of thousands of hybrids and other fuel-efficient vehicles from the Big Three shows that our domestic auto industry will weather this current crisis and build the cars of the future.” But certainly, it shows nothing. If the car companies were capable of building the cars of the future that consumers want to buy, no bailout would have been needed, and the government would not have to place an enormous, personal order for automobiles in order to keep the assembly lines moving and inventory lots turning over. The only thing the mega-purchase “shows” is Detroit’s inability to sell its automobiles at bloated prices in the free market, thereby leaving the government to spend taxpayers’ money on goods they refused to buy on their own.

In fact, giving the kiss of life to two dead horses, GM and Chrysler, illustrates the futility at work here, considering that both companies have just announced there will be a considerable number of dealership closings all over the country. Chrysler plans to close about 800 dealerships while GM will trim back 2,600 dealers by 2010. The fact that GM is cutting back its dealerships to the tune of 42 percent speaks volumes about its bloated, bubble-fueled predicament. The government has been pouring billions into each company’s bailout bin in order to keep these inefficient, surplus dealerships around so that they could continue on their path of chasing invisible customers and not selling cars. The misallocation of resources has been staggering. Half-baked investment decisions, like these, are what we can expect from a politically anointed task force that will centrally plan the manufacture of automobiles.

$19 $15

As the Chrysler resuscitation continues and GM morphs into Government Motors, we can expect that the government will prepare to churn out its environmentally correct greenmobiles that the market has rejected over and over again. Freedom, choice, and capitalism will pay a dear price because a group of government bureaucrats, on the receiving end of political favors, will run a major sector of the US economy and foist a prescribed lifestyle upon American consumers.

The funeral bell is ringing a reminder of capitalism’s mortality. And I won’t dare touch on what happens when government-run automobile manufacturers perform like the post office or the DMV.

How do you measure wealth generation?

1) Average annual gains?

2) Gains relative to an underlying index (the S&P 500)?

3) Gains relative to inflation?

Of these three, the last is the only real means of gauging wealth creation or destruction. Commentators have been going bananas over the fact that stocks are up 20%+ since their bottom of 666. No one mentions that this rally may actually be induced by the Federal Reserve pumping trillions of dollars into the financial system.

Similarly, no one mentions that adjusted for inflation, stocks are still WAY down from their peak during the Tech bubble.

As you can see, stocks entered a bear market in earnest following the Tech Crash. Yes, in number or nominal terms, the Dow has risen. But you have to remember the dollar lost roughly a third of its value from 2001 to today. Measuring stocks or anything in dollars between now and then was like measuring with a ruler that was continually shrinking.

Also, bear in mind that the above chart is using the Government’s phony measure of inflation: the Consumer Price Index [CPI] which DOESN’T include food or energy prices. Using accurate inflationary data, stocks are down even more in real terms.

My main point is this: inflation is an ever-present reality in the post WWII era. Investors need to be protecting themselves from this beast at all costs. You can do this by:

• Buying gold
• Buying commodities or real assets
• Buying companies that can offset inflationary costs by raising the price of their products
  

I suggest having some money in all three. It’s the only certain way to protect your wealth from inflation. The Feds are cooking up an inflationary storm of epic proportions, pumping TRILLIONS of dollars into the financial system. Stocks may rally like a rocket-ship from here. But in real terms they’re still tanking.

After all, if the Dow hits 30,000, but you’re celebrating by drinking a $150.00 coke… are you really any richer?

The above chart shows the projected sources of funding (receipts) for the U.S. Government for 2009.  Borrowing (the federal budget deficit) is projected to account for nearly half of all funding.  If you read yesterday’s post, you also know that the amount of borrowing in 2009 is likely to increase (because the Obama administration’s budget assumptions are too optimistic).

Advertisements | Space Coast Lawn Care | Exchange Hosting | Naples Computer Repair

By Dr Housing

Let me be abundantly clear.  We still have a Pay Option ARM and Alt-A mortgage problem.  This will hit in full force in 2010 and we are already seeing many mortgage holders having trouble with actual recasts brought on by negative amortization.  Yet there is a crew of people saying that Alt-A mortgage products will not bring any trouble because of the low interest rate environment.  Unfortunately the low rate misses the bigger issue.  Low rates are helping but the problem that we will be seeing is the massive onslaught of recasts, not resets that will be occurring over the next few years.  This is a big reason why we won’t see a housing bottom in California until 2011 at the earliest.  Many of these loans were made to supposedly better qualified borrowers in mid to upper priced areas.  These areas will begin to crack like an egg dropped on the floor late in 2009.  The Notice of Default tsunami will guarantee this much.

I’m am stunned that some people are actually saying that Alt-A mortgages or Pay Option ARMs will create little problems in the market.  Okay.  Then how about we remove the public-private investment program that conveniently has a cap with the FDIC of $500 billion?  After all, if there isn’t any problem with toxic mortgages why should we have a toxic mortgage program that has the design to eat up $1 trillion in loans.  Exactly.  Let me break down the latest figures from data by none other than the Federal Reserve:

California

At the end of March 2009

Subprime loans active:  $119 billion

Alt-A loans active:            $288 billion

U.S.

Alt-A active:       $469 billion

When we talk about the $500 billion in Alt-A mortgages this is what we are talking about.  Last time I checked $469 billion does not mean the problem has gone away.  Businessweek came out with a chart only last month showing how Pay Option ARMs will be recasting over the next few years:

Click for sharper image

I’ve added a reference point for all those people who seem to think that Option ARMs and Alt-A loans have somehow disappeared from the market.  The game is just starting.  Currently, we are seeing less than $2 billion per month of these loans recasting.  However, in 2010 we are going to start seeing $8 to $10 billion per month recast, nearly 5 times the current rate.  The chart states “months to 1^st reset” but they are referring to recasts brought on by negative amortization.  And as you will see, since the majority of these loans are in California the bulk are underwater Jacque Cousteau style.

Wachovia in their infinite wisdom swallowed up Golden West at the height of the lending insanity.  This cratered the bank which was taken over by Wells Fargo.  Just because you eat a bank doesn’t mean the toxic waste suddenly disappears.  In fact, there is still well over $100 billion in Pick-A-Pay mortgages in their portfolio.  Wells Fargo has written off a portion of the portfolio but there is still a significant amount remaining:

This is from their most recent 10-Q.  Wells Fargo alone has $42 billion in unpaid principal linked to Pick-A-Pay mortgages here in California.  The Pick-A-Pay was basically the Pay Option ARM World Savings Style.  Here were the terms:

Source:  Mortgage X

These are the crappiest loans in the world.  World Savings which was owned by Golden West thought that by simply having a little more collateral and looking at FICO scores that handing out toxic waste would be smart.  Some of these insane loans don’t have the first adjustment until 10 years later!  Of course, if Wells Fargo had any sense they would look at that absurd 152% LTV and freaking recast the entire lot.  Somehow I doubt they are doing this since they are too busy sucking up taxpayer money through the crony bailout and pretending everything is fine through manufactured stress tests.  Look at the LTV on some of the toxic foursome.  Arizona actually beats California out with a 161% LTV which is astonishing in itself.  But again, out of this little section of $61 billion in Pick-A-Pay loans $42 billion are in California, a state that has seen the median price drop by 50% in one year.

Wells Fargo seems to have the biggest amount of this crap on their books.  Yet Bank of America and JP Morgan now have a lot since they acquired toxic mortgage experts Countrywide Financial and WaMu.  Let us first look at Bank of America:

Advertisements | Naples Caterer | Naples Graphic Design | Bible Covers

Bank of America has $20 billion in Pay Option ARMs courtesy of Countrywide.  But keep in mind Countrywide was a toxic mortgage expert and other Alt-A crap producer.  They are the 31-Flavors of toxic waste.  We can find some of that junk in the whopping $261 billion residential mortgage portfolio.  If you haven’t realized it yet, if you lose your job any mortgage becomes toxic if you are underwater and can’t make the payment.  So many of these “prime” loans are equally bad.  The only difference is these Pay Option ARMs are monstrosities of epic proportions born in the laboratory of financial meth labs.  Take a look at what the California Attorney General shows through one glorious example of a Countrywide Pay Option ARM:

Here we get a firsthand look of a toxic mortgage product in action.  This is for a $460,000 loan which is what is sitting in many of those mid to upper priced areas in California.  Initially, the first year payment is $1,479 which of course is absurdly low.  But by the time we hit the first 5 year adjustment our payment jumps up to $3,747!  The payment more than doubles.  These craptastic loans were made throughout the bubble from 2004 to 2008 (yes, 2008 with freaking Wachoiva).  A large number of these will have major adjustments in 5 years (that is why we are seeing the first batch now) while some like the idiotic Pick-A-Pay loans can go on for 10 years.  Like I stated before, I highly doubt that Wells or BofA are going to push to recast many of these loans since they are going to fold the minute they do it.  Most people in these loans can’t sell and are basically renters.  That is until they hit recast and you will be seeing some massive moonwalking from homes.  Yet buyers are walking because they are not building equity (aka, renting).  If you bought a place for $500,000 and now know it is worth $250,000, you might make that $1,500 a month payment but are you going to make the payment once it goes up to $3,700?  Heck no!  You are out.  These banks are praying the market will recover.  It will not.  At least not under their delusional expectations and V-shaped bubble recovery plans.

Let us look at JP Morgan who ended up swallowing up WaMu, another Pay Option ARM fanatic.  Before WaMu went under like the titanic they had a gigantic amount of Pay Option ARMs:

Right before WaMu bit the banking dust, it had $52 billion in Pay Option ARMs.  And where were the bulk of these loans?  If you guessed California you win a prize:

Now JP Morgan wrote down a large part of this portfolio.  But how much of it?  That is the real question.  If we are to take the stress test as any guide, banks are still insanely optimistic of potential losses.  Let us pull up the latest 10-Q for JP Morgan:

According to the above, they still have $40.2 billion in Option ARMs and $21 billion in subprime loans.  But another major issue that I won’t address here but should be obvious is that massive “home equity” line item.  JP Morgan has $140 billion in these loans.  Many times, these loans are combined with Pay Option ARMs which makes for a dynamic duo of crap.  These loans are secured by home equity which doesn’t even exist anymore!  These will implode simultaneously as things get worse with these loans.  In the Pick-A-Pay portfolio with Wells, the majority of people make the minimum payment meaning negative amortization.  Meaning, the bank most likely will recast the product based on the appraised price at time of sale.  Many will say otherwise but this is the only logical conclusion.  If we are to appraise those loans in today’s current market, the vast majority of the portfolio would shatter the 110% or 125% (insane) caps and all these mortgages would hit recast oblivion.  I doubt that since banks are waiting for the PPIP so the taxpayer can assume the position at the worst time.  And that is why this problem hasn’t been solved.  I’ve heard a few misguided pundits say that most of these loans have been refinanced.  Sorry, the data above doesn’t show that.  Most of these are still out there.  The only refinancing going on with these toxic mortgages occurs in the foreclosure process.

So why has refinancing activity picked up?  Because buyers in no financial trouble have taken advantage of the low mortgage rate environment and this is smart.  But don’t think all the activity was because of subprime and Alt-A borrowers running to get new government backed mortgages.  They don’t qualify!

I’ll leave you with the most recent graph from Credit Suisse:

The big hit is going to be in 2010.  With 135,000 Notice of Defaults in California for Q1 of 2009, the second half of the year is going to expose the eye of the hurricane we are currently in.  The pundits who say these loans have been taken care mistake silence with a problem being solved.  The data does not back them up but since when do we expect pundits to pay attention to data?

May 21 (Bloomberg) — The odds on the dollar, Treasury bonds and the U.S. government’s AAA grade all heading for the dumpster are shortening.

While currency forecasting is a mug’s game and bond yields can’t quite decide whether to dive toward deflation or surge in anticipation of inflation, every time I think about that credit rating, I hear what Agent Smith in the “Matrix” movies called “the sound of inevitability.”

Several policy missteps suggest that investors should stop trusting — and lending to — the U.S. government. These include the state’s pressure on Bank of America Corp. to buy Merrill Lynch & Co.; the priority given to Chrysler LLC’s unions over the automaker’s secured creditors; and the freedom that some banks will regain to supersize executive bonuses by giving back part of the government money bolstering their balance sheets.

Currency markets have been in a weird state of what looks almost like equilibrium for the past couple of months. What’s really going on is something akin to an evenly matched tug of war that fails to move the ribbon tied around the center of the rope, giving the impression of harmony while powerful forces do silent battle until someone slips.

“All currencies are being debased dramatically by their central banks at extraordinary speeds and so in relative terms it appears there is no currency problem,” Lee Quaintance and Paul Brodsky of QB Asset Management said in a research note earlier this month. “In reality, however, paper money is highly vulnerable to a public catalyst that serves to acknowledge it is all merely vapor money.”

Flesh Wounds

Why pick on the dollar, though? Well, not necessarily because the U.S. economy is in worse shape than those of the euro area, the U.K. or Japan. The biggest problem is that external investors — particularly China — have more skin in the dollar game than in euros, yen or pounds, which makes the U.S. currency the most likely candidate to meet the cleaver in a crisis of confidence about post-crunch government finances.

China owns about $744 billion of U.S. Treasury bonds in its $2 trillion of foreign-exchange reserves.

Chinese exports, though, are dropping as the global economy weakens, with overseas shipments declining 23 percent in April from a year earlier, leaving a nation that has already expressed concern about its U.S. investments with less to spend in future.

Advertisements | Fort Myers SEO | Naples Computer | Email Archiving

‘Heavy Hand of Government’

Those kinds of concerns are starting to surface in a steepening of the U.S. yield curve, driven by an increase in 10- and 30-year U.S. Treasury yields. The 10-year note currently yields 3.23 percent, about 235 basis points more than the two- year security, which marks a near doubling of the spread since the end of last year.

“When the government parks its tanks on capitalism’s lawns, that spells trouble for those who invest, add value and create jobs,” says Tim Price, director of investments at PFP Wealth Management in London. “Trillion-dollar bailouts do not only leave massive public-sector deficits in their wake, they also leave the presence of the heavy hand of government all over industry and markets, so the outlook for government bonds is less promising than the economic textbooks on deflation would have us believe.”

Earlier this month, the U.S. reported the first budget deficit for April in 26 years, with spending exceeding revenue by $20.9 billion, even though that’s the month when taxpayers have to stump up to the Internal Revenue Service and the government’s coffers should be overflowing. So far this fiscal year, the U.S. shortfall is $802.3 billion, more than five times the $153.5 billion gap in the year-earlier period.

Deathly Deficit

For the fiscal year ending Sept. 30, the Congressional Budget Office forecasts a record deficit of $1.75 trillion, almost four times the previous year’s $454.8 billion shortfall and about 13 percent of gross domestic product. Bear in mind that the target demanded of European nations wanting to join the euro was a deficit no greater than 3 percent of GDP.

David Walker, a former U.S. comptroller general, wrote in the Financial Times on May 12 that the U.S.’s top credit rating looks incompatible with “an accumulated negative net worth” of more than $11 trillion and “additional off-balance-sheet obligations” of $45 trillion. “One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate,” he wrote.

No Default

It is undeniable that the U.S. government’s ability to finance its borrowing commitments has deteriorated as its deficit has ballooned. Dropping the U.S. from the top rating grade, though, wouldn’t mean the nation is about to default on its debt obligations; there’s a subtle distinction between ability to pay and propensity to fail to pay. There’s also a compelling argument that no government should be enjoying the benefits of a top credit grade in the current financial climate.

Using the definitions outlined by Standard & Poor’s, a one- step cut into the AA rated category would nudge the U.S.’s creditworthiness into a “very strong” capacity to fulfill its commitments, just weaker than the “extremely strong” capabilities demanded of AAA rated borrowers. That seems an appropriately nuanced sanction — albeit one that the rating companies might turn out to be too cowardly to impose.

(Mark Gilbert is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net

Gov. Arnold Schwarzenegger and other state officials face tough fiscal choices now that voters have defeated a series of budget proposals.

NEW YORK (CNNMoney.com)

Note to Californians: Get ready for larger class sizes, fewer police patrolling the streets and more public offices shuttered on weekdays.

State officials are now scrambling to close a $21.3 billion fiscal shortfall, a gap that grew by $6 billion overnight after residents voted down five budget propositions Tuesday.

The state must make “severe cuts now,” Gov. Arnold Schwarzenegger said Wednesday. He and state legislative leaders will have to hammer out a budget deal before the fiscal year ends on June 30. The gap covers the rest of this fiscal year and the next.

“There will be around $5.3 billion in additional cuts in education, there will be severe cuts in health care, which is another area where you know we spend a lot of money, and then of course you have to go and look in other areas like prisons,” said the governor, who was in Washington, D.C., meeting with the Obama administration.

While most states are facing cash crunches as the economy weakens, California’s problems are larger than most. Only three months ago, state officials agreed on a budget deal that closed a $40 billion gap by cutting $15.8 billion in spending, temporarily raising the state sales tax by a penny, borrowing $5.4 billion and using nearly $8 billion in federal stimulus funds.

The state has also suffered mightily in the economic downturn. Its unemployment rate hit 11.2% in March, fourth highest in the nation, while its median home price dropped 54% over the past two years, according to the California Budget Project.

Advertisement: Mercado Naples | Bible Covers | Email Archiving Service

Meanwhile, revenues are running $2.1 billion below estimates, according to the state controller.
Back at the budget table

Now they are back at the table, facing another massive shortfall. And unless the budget problems are addressed, the nation’s most populous state won’t have enough money to pay many of its bills on time in the coming fiscal year, the California Legislative Analyst’s Office said earlier this month. The state controller already had to delay $3 billion in payments in February because of a lack of cash.

California’s options are more limited than most. Leaders are constrained by having the nation’s lowest state bond rating, which makes borrowing more expensive, and by a multitude of voter-approved propositions that dictate their spending.

“They are not flush with choices,” said Jerry Nickelsburg, senior economist with the UCLA Anderson Forecast. Officials will look to education, health care and prisons because “they are about the only places you can find the money.”

The defeated proposals would have allowed the state to divert money earmarked for early childhood education and mental health programs into the general fund and to borrow funds from the state lottery.

Even if these measures had passed, Schwarzenegger said he still needed to cut $3 billion from education spending, reduce funding for the state’s Health and Human Services department, reduce the state workforce by 5,000 people and obtain $6 billion through short term borrowing to close a $15.4 billion gap.

Last week, the governor said that if the propositions are defeated, he’d be forced to cut another $2.3 billion from the education budget, eliminate funding for substance abuse treatment, crime prevention, HIV education and prevention and outreach efforts by the state public college systems. He would also have to borrow $2 billion from local governments, forcing them to cut back their spending on law enforcement and other services.

California residents will likely see teachers laid off and a shorter school year, said Daniel J.B. Mitchell, professor of management and public policy at the University of California at Los Angeles. Already, the Los Angeles court system announced it will be closed one day a month to conserve funds.

“There’s no end to the things you can cut,” Mitchell said.

State officials are also looking to Washington, D.C., for additional help. Treasurer Bill Lockyer last week sent a letter to Treasury Secretary Tim Geithner, renewing his call for the federal government to backstop the state’s debt. This will help lower California’s borrowing costs, freeing up more money for services.

“It’s critical,” said Jean Ross, executive director of the California Budget Project. “Otherwise, you end up with California cutting deeper or taxing more.”