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Kenney wants to limit city's use of exotic debt swaps

CITY COUNCILMAN Jim Kenney says that he doesn't want Wall Street fat cats pulling a fast one on the city.

Councilman Jim Kenney asks a question during Tuesday's session. He was concerned about tax burdens, a concerned echoed by taxpayers on Wednesday. (David Maialetti/Staff)
Councilman Jim Kenney asks a question during Tuesday's session. He was concerned about tax burdens, a concerned echoed by taxpayers on Wednesday. (David Maialetti/Staff)Read more

CITY COUNCILMAN Jim Kenney says that he doesn't want Wall Street fat cats pulling a fast one on the city.

Kenney wants to draft legislation that would stop or limit the use of an exotic investment tool known as an "interest-rate swap." He contends that such investments are dangerous for the city's bottom line.

"I think I would rather err on the conservative side for the taxpayers than try to be Gordon Gekko," Kenney said, invoking the greed-is-good villain of the movie "Wall Street."

Some municipalities have lost massive sums through swaps, which were billed as a way to lock in low interest rates and hedge against stock-market changes. But when the economy crashed, many governments were left with huge losses.

Just how much past swap deals - all started by previous mayoral administrations - have cost the city is a point of debate. City Treasurer Nancy Winkler said that the price tag to date for the city and related agencies could be anywhere from $28.9 million in savings to $35.1 million in costs. Meanwhile, the Pennsylvania Budget and Policy Center said the city has paid out more like $170 million to settle swaps.

The school district also entered into swaps, which the policy center said lost money. No district officials attended the hearing, but the district submitted testimony saying that the swaps had saved money.

State Auditor General Jack Wagner railed against swaps during his testimony.

"In reality, swaps are nothing more than a form of gambling with public funds," Wagner said. "How much is won or lost is based on the size of the underlying debt. Swaps are inherently dangerous financial instruments for public entities."

Winkler said that the city has been winding down swap investments and that about 10 percent of the city's investments are in such deals. She also said that the city has developed a strict policy for the use of swaps and that sometimes the transactions can save money.

"I would hate the idea of forever removing that as a tool," Winkler said.

But Kenney said he was concerned about what could be the swap of the future.

"The unborn banking Wall Street whiz is going to screw everybody over, 20 years from now," Kenney said. "We need to protect ourselves."