NY Times | How Banks Could Return the Favor to Governments

How Banks Could Return the Favor

LIKE millions of homeowners, shrewd state and local governments are looking to refinance. Interest rates have hit rock bottom. So why not save some public money by replacing old debts with new ones at lower rates?

The bad news for taxpayers is that such easy refis are out of the question for many governments and agencies short on cash. And that’s because these borrowers have been trapped by Wall Street.

Behind all of this is — you guessed it — derivatives. Bankers have embedded interest-rate swaps in many long-term municipal bonds. Back when, they persuaded states and others to issue bonds and simultaneously enter into swaps. In these arrangements, the banks agreed to make variable-rate payments to the issuers — and the issuers, in turn, agreed to make fixed-rate payments to bond holders.

These swaps were supposed to save the public some money. And, for a while, they did. Then the financial crisis hit — and rates went south and stayed there. Now issuers are paying bond holders above-market rates as high as 6 percent. In return, they are collecting a pittance from banks — typically 0.5 percent to 1 percent.

Why not just refinance the old bonds? Well, if you think it’s costly to refinance a home mortgage, try refinancing a derivatives-laced muni. The price, in the form of a termination fee, can be enormous. New York State, for one, has paid $243 million in recent years to extricate itself from swaps-related debt. That money went straight from taxpayers’ pockets to Wall Street.

Rest here…



3 Responses to “NY Times | How Banks Could Return the Favor to Governments”
  1. PJ says:

    The reason why no one wants to use that leverage is simple – if they do that, the Wall Street crowd will give them less money for their re-election campaigns (or, in some cases, I’m sure, just less money). While it makes sense for the general public for these “public servants” to bargain hard (like they do with the evil unions), when it comes to bargaining with Wall Street, they fold like paper. Always just folow the money.

  2. Fed up says:

    Spartacus & Crixus: Kill the Banksters Kill them all !!!!

  3. Sarah says:

    Why not just default? 🙂

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