Fallout from a record default spreads from Washington State to Wall Street
D-day finally arrived last week for the Washington Public Power Supply System. D for default. D for debacle. With its coffers almost empty, WPPSS or Whoops, as everyone now calls the agency, formally declared that it could not repay $2.25 billion in bonds used to finance partial construction of two now abandoned nuclear power plants in Washington State. It is by far the largest municipal bond default in U.S. history, and the damage is incalculable. The fiasco has robbed thousands of investors of their savings, shaken confidence in the municipal bond market, angered and humiliated the people of the Northwest, tarnished the reputations of some of Wall Street's leading institutions and provoked at least 70 lawsuits that will be clogging the courts for years to come.
Over the past decade, Whoops borrowed $8.3 billion to start construction on a total of five nuclear plants, only one of which is likely to be completed. The bonds in default were issued for two plants that Whoops calls Projects 4 and 5. Some $6 billion worth of other Whoops bonds for Projects 1, 2 and 3 are in no immediate danger of default, but investors are increasingly afraid that these securities will also eventually be in jeopardy. Projects 1,2 and 4 are located at the Hanford Nuclear Reservation in eastern Washington, while 3 and 5 are at Satsop, in the western part of the state.
The default had been expected for weeks, so the municipal bond market reacted quietly, with most prices holding fairly steady. But concern about Whoops' woes had been depressing the market for months. Public utilities building power plants have had to promise exceptionally high tax-exempt interest rates of more than 9% to sell new bonds. Several utilities, like North Carolina Municipal Power Agency No. 1, postponed their offerings to avoid testing the market. Some industry insiders fear that the continuing Whoops mess could ultimately sour investors on the entire spectrum of municipal bonds. Says James Lebenthal, whose appearances in television commercials have made him America's most recognizable municipal bond dealer: "I feel threatened, and so does the whole industry. I feel the shame of Whoops."