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Tuesday, January 17, 2012

Report: Swaps cost city, school district $331 million

The Pennsylvania Budget and Policy Center, a progressive-leaning government watchdog, is taking on Wall Street (without tents, we believe).

According to a report released by the group today, the city and school district have lost $331 million from interest rate swaps with big banks like Morgan Stanley and Goldman Sachs — and could lose $244 million more in future years.

Interest rate swaps are complex, risky financial agreements that dozens of local governments and school districts throughout the state entered into before the economic meltdown.

At a press conference this afternoon, the Policy Center's director Sharon Ward said the banks should return some of their expensive cancellation fees to the city and School District, as well as renegotiate the current swaps. She argued that they should be "good corporate citizens," especially because taxpayers bailed them out.

Ward was joined by an Occupy Phlly member, a public school parent/advocate, a former School District nurse and Anne Gemmell, the political director of Fight for Philly.

When a reporter asked if others, including the city, should also be held responsible for the swaps, Gemmell said, "Let's not forget that the city was not bailed out." She added that banks likely knew more about the future of swaps than city or school district employees.

You can download the Policy Center's full report here.

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Posted by Holly Otterbein @ 4:56 PM  Permalink | 22 comments
Comments   
  • 0 like this / 0 don't   •   Posted 6:19 PM, 01/17/2012
    Dummies!!!
    — Black Label Society
  • Comment removed.
  • 0 like this / 0 don't   •   Posted 6:35 PM, 01/17/2012
    So many cities and school districts got into something that they didn't understand well enough to gamble with the taxpayers' money.
    — Falls Ed
  • 0 like this / 0 don't   •   Posted 7:07 PM, 01/17/2012
    But both these companies were screaming buy, buy, buy at the same time they were secretly selling their own holdings.
    — nebulus
  • 0 like this / 0 don't   •   Posted 8:00 PM, 01/17/2012
    I would love to know what city official signed off on this and what were their qualifications were. Heads should roll on this one.
    — Taxpaying Voter
  • 0 like this / 0 don't   •   Posted 8:16 PM, 01/17/2012
    States, Munies and NFPs all entered into swap contracts as they get a better price selling their debt with a variable interest rate. They then enter into a swap contract to a fixed interest rate (which they prefer) in order to remove the risk of interest rates going up (in a period where rates were at historical lows). The organization likes the fixed rate so they can budget and manage cash flow (in which debt service is a significant portion of the overall budget). NOBODY thought interest rates would fall to near zero percent.

    That being said, these losses are in essence paper losses (meaning if the city issued a fixed rate debt their cash payouts would be the same - or maybe even higher as the fixed rate would prob have a higher interest rate).

    I just wonder if interest rates rose dramatically if the city would be willing to renegotiate with the banks to help them in the loss position?
    — dankil13
  • 0 like this / 0 don't   •   Posted 9:36 PM, 01/17/2012
    States and municipalities were too eager to keep on borrowing. They consider the federal government a backstop for their overborrowing and overspending.
    — Falls Ed
  • 0 like this / 0 don't   •   Posted 9:55 PM, 01/17/2012
    @dankil13
    Maybe I'm being naive, but if losses from rates swings could potentially add up to 500million+ does that mean the District is carrying a debt in the tens of billions?
    — JoeinSouthPhilly
  • 0 like this / 0 don't   •   Posted 8:10 PM, 01/17/2012
    Listen to the Taxpaying Voter!
    — JL Barnes
  • 0 like this / 0 don't   •   Posted 8:11 PM, 01/17/2012
    Hmmmmm, Pennsylvania Budget and Policy Center's director is Sharon WARD. The Special Finance Director at The School District of Philadelphia is Christiana C WARD. Whispers at the district blamed
    her for being over her head and really screwing up on the swaps. Sharon and Christiana Ward??? Any connection or possible motive for asking for a do-over? Hmmmmmmmmmmmmmmmmmm
    — __Brinsley
  • 0 like this / 0 don't   •   Posted 8:40 PM, 01/17/2012
    nobody understands bank speak.
    they promise that no matter what they tell you to "bet" on, you'll be a winner.
    of course they are the only winners, because even when they lose, we bail them out.
    but nobody bails us out.
    look at Greece, how many times has Greece refinanced their debt with the promise of who knows what, for extremely substantial fees to the banks.
    — ald
  • 0 like this / 0 don't   •   Posted 9:36 PM, 01/17/2012
    Someone needs to explain what an interest rate hedge is to this woman. Are the banks supposed to honor the hedge when rates rise, but give the school district the benefit of lower interest costs when rates drop? Please. Bail out or not, we're all in a lot of trouble if you can just tear up contracts when they no longer suit you.
    — Noonan
  • 0 like this / 0 don't   •   Posted 10:13 PM, 01/17/2012
    It seems somewhat underhanded to me. When your company is made solvent with tax dollars you should probably operate in better faith with tax payers. I think we can agree, that in this instance, even without legal obligation, interest rates should be renegotiated.
    Of course it may be more than underhanded when you consider that the head of Goldman Sachs was college roommates with Ben Bernake.
    — JoeinSouthPhilly
  • Comment removed.
  • 0 like this / 0 don't   •   Posted 10:57 PM, 01/18/2012
    Actually is just seems underhanded because it is. Somethings are black and white and this is one of them /
    — JoeinSouthPhilly


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