Bear Stearns' collapse this week won't impact the Modesto Irrigation District or the city of Modesto even though the fallen financial giant backed some of their bonds, the MID and city officials said Tuesday.
Instead, the financial arrangements will be transferred to JP Morgan, the bank that bought Bear Stearns on Monday in a government- supported fire sale.
Bear Stearns was the underwriter for two MID bonds worth $159 million. The city is responsible for paying down one of them, a $93 million package the MID issued last year to fund improvements to Modesto's water system.
MID spokeswoman Kate Hora said the bonds are in better shape because JP Morgan is considered a stronger company than Bear Stearns was even before its value plummeted.
"Naturally, the MID is concerned about what's happening in the financial markets, and we're watching the situation very closely," she said. "The Bear Stearns fallout has no effect on our existing financial transactions or contracts. It makes no difference at all to us."
Investors abruptly bailed on Bear Stearns because of questions about its stake in uncertain subprime mortgages.
Similar fears last month roiled one of the bond markets in which the MID and the city had financed hundreds of millions of dollars for public improvements.
Both agencies are taking steps to restructure those bonds, known as auction-rate securities. They have variable rates set by banks at weekly auctions.
Doubts about bond insurers drove up those rates, costing the city $107,000 per month in additional interest payments and the MID an extra $250,000 per month.
City Finance Director Wayne Padilla said the auction-rate bonds have stabilized from last month, settling at a rate of 5.25 percent from a high of 8 percent. But the city does not want to wait out the turbulence.
It's "just not something the market is going to be interested in dealing with for some time," he said.
Bee staff writer Adam Ashton can be reached at firstname.lastname@example.org or 578-2366.