By now, pretty much anyone reading this is aware of the destructive role played by derivatives - largely, although not exclusively purveyed by Goldman Sachs -
in creating the mess in Greece now rolling through Europe under the rubric of the "Euro debt crisis".
What may be a bit more shocking is that these same sort of dubious government financial practices turn out to be just as "popular" WITHIN the US as well.
And what could be more prototypically American than the Southern state of Georgia,
where cosmopolitan Atlanta has spawned "mini-mansion"
But in the wake of Black September 2008, it turns out that several municipalities in metropolitan Atlanta are also paying the price for their embrace of exotic, high-risk derivative securities —
to the tune of hundreds of millions of dollars, as this investigation by The Atlanta-Journal Constitution has found.
[N.B. By now, this article may be behind the "pay wall" of the newspaper, usually known as AJC - if so, our apologies ... just part of the "cost of doing business" in this economediatic world ;-) .]
At least a dozen local governments and other institutions that used derivative deals called swaps to try to lower the cost of bond issues have ended up owing as much as $394 million in fees to the Wall Street investment banks that set up the deals, an AJC analysis of public debt documents shows.
That total includes at least $100 million in fees paid to firms such as Goldman Sachs, J.P. Morgan and UBS AG just to cancel the deals when they went sour.
The city of Atlanta was among the hardest hit by its use of swap schemes — complex, multi-party deals involving varying interest rates, cash payments and loan guarantees.
Atlanta shelled out about $86 million to cancel most of its derivative deals.
The city also still owes roughly $79 million on another soured swap deal, an obligation it hopes it can reduce in time.
Other local entities caught up in the swaps meltdown include the city of Marietta, Georgia State and Emory universities, and the Woodruff Arts Center.
The huge fees owed the banks came on top of millions of dollars paid to the firms to broker the original deals, which amounted to about $4 billion in financing.
Some of the borrowers have had to take on more debt and pay higher interest rates on new bonds to replace the problematic deals, boosting the costs of financing the bonds even further.
These hefty refinancings and fee payments occurred even as the city of Atlanta and other institutions were cutting budgets, laying off employees, reducing services and being downgraded by bond rating agencies because of budget shortfalls.
In each case, the higher costs will likely be passed on to taxpayers or the users of the various institutions, which include the city’s water system and airport, some area hospitals and other facilities.
Often, the details of the deals are buried in arcane bond documents.
The refinancings and payments over the past two years didn’t gain much notice in city council meetings,
and the huge fees involved in terminations and refinancings are often folded into the costs of the new loan deals.
The nearly $400 million in swaps fees uncovered by the AJC were found in just a sampling of local institutions.
It’s unclear just how much swaps may have cost public debt issuers here, or across the nation.
Some estimates put the total value of swaps and other interest-rate derivatives around the globe at more than $400 trillion.
“That is the one question that everyone is trying to answer,” said Bart Hildreth, a municipal finance expert at Georgia State University’s Andrew Young School of Policy Studies.
Informed of the AJC’s findings, John Sherman, president of the Fulton County Taxpayers Foundation, said: “There is no place for such risk in government.”
Sherman said several local development projects in recent years included both tax abatements and risky swap deals that are now adding to the strain on municipal budgets.
“I believe it falls under the same heading: throwing away taxpayer money when we can’t afford it,” he said.
Swaps have been widely used by corporations, banks and other borrowers as a way to take advantage of lower interest rates on short-term debt and cut costs of borrowing.
For municipal borrowers, though, the complex deals carry more risk than the old-fashioned, fixed-interest bonds that once were used almost exclusively,
said David Nix, a bond and derivatives lawyer with Kutak Rock in Atlanta. The borrower “needs to understand what they’re getting into,” he said.
How did things turn out this way?
Municipal borrowers under pressure to cut costs and keep taxes in check were wooed by investment bankers and financial advisers who offered creative ways to tap cheaper sources of capital, say experts.
The swap deals involve cities and other borrowers who trade cash payments with investment banks while other parties provide financial guarantees and pricing information.
To read more at http://www.economywatch.com/
http://www.economywatch.com/
