Neu Leonstein
27-11-2008, 03:38
http://www.bloomberg.com/apps/news?pid=20601109&sid=aUYLG7W1nGpM&refer=home
Deutsche Bank Swap Lures County as Budgets Crumble (Update1)
Nov. 26 (Bloomberg) -- As Wall Street’s biggest banks run away from derivatives, Dauphin County, Pennsylvania, home of the state capital, Harrisburg, is embracing them.
The three-member county commission voted in August to approve two “range accrual swaps” with Deutsche Bank AG, according to minutes of the meeting. The interest-rate swaps, which involve $42 million of fixed-rate debt, guarantees Dauphin County $816,000 the first year and then wagers taxpayers’ money that short-term interest rates beginning in September 2009 won’t exceed 7 percent. Those rates are 2.2 percent now.
“It’s a way for us to raise revenue for the county,” said Chad Saylor, chief of staff to the county commission. “The only source of revenue we have, much like the school districts here, is the property tax.”
The commission’s decision shows the appeal of derivatives, even as states, cities and counties reel from misplaced bets on them. It also illustrates the lure of easy money at a time when municipal finances are deteriorating and the market for interest-rate swaps is under a federal criminal investigation into whether Wall Street banks conspired to overcharge local governments on the contracts.
Florida’s Miami-Dade County paid about $75 million in July to terminate a swap on its water and sewer bonds after the credit rating of an insurer guaranteeing the debt was cut. It plans to pay an additional $40 million to $50 million, following a refinancing this month. New York paid $44.6 million as of Sept. 30 to unwind swaps after they failed to protect the state when the interest on auction-rate securities surged.
[...]
http://www.informationarbitrage.com/2008/11/the-seduction-of-municipal-derivatives-just-dont-do-it.html
The Seduction of Municipal Derivatives: JUST DON'T DO IT
Bloomberg just ran a story on municipalities entering into derivatives contracts to help finance budget deficits. I've seen this movie before about 15 years ago, and I can tell you how it ends: in tears. As someone who spent much of my career in the realm, I can and have provided examples of the prudent use of derivatives: primarily, as risk management tools for issuers. The problem is, these municipalities are neither hedging anything nor do they truly understand the ramifications of their actions.
Without getting too complicated, counties, cities and states who feel desperate sometimes sell massive amounts of optionality to investment banks, with large embedded spreads for the dealers, and hope and pray that the options they've sold don't move in the money. Problem is, they almost always do. My fervent belief is: hope and prayer should not play a role in municipal finance (or in the White House, for that matter). If there are fundamental problems with balancing the budget, deal with it head on. But there is never a free lunch, and the pains of unwinding disastrous derivatives transactions can burden local governments for a generation.
[...]
I think everything is explained in the two links. So what are your views? Who are the bad guys here? How would you prevent it - for some local government departments, these instruments might be the only way to keep their jurisdictions running. Is it perhaps because of rules on how they can run their budgets, including deficits in bad times when their revenue streams dry up?
Deutsche Bank Swap Lures County as Budgets Crumble (Update1)
Nov. 26 (Bloomberg) -- As Wall Street’s biggest banks run away from derivatives, Dauphin County, Pennsylvania, home of the state capital, Harrisburg, is embracing them.
The three-member county commission voted in August to approve two “range accrual swaps” with Deutsche Bank AG, according to minutes of the meeting. The interest-rate swaps, which involve $42 million of fixed-rate debt, guarantees Dauphin County $816,000 the first year and then wagers taxpayers’ money that short-term interest rates beginning in September 2009 won’t exceed 7 percent. Those rates are 2.2 percent now.
“It’s a way for us to raise revenue for the county,” said Chad Saylor, chief of staff to the county commission. “The only source of revenue we have, much like the school districts here, is the property tax.”
The commission’s decision shows the appeal of derivatives, even as states, cities and counties reel from misplaced bets on them. It also illustrates the lure of easy money at a time when municipal finances are deteriorating and the market for interest-rate swaps is under a federal criminal investigation into whether Wall Street banks conspired to overcharge local governments on the contracts.
Florida’s Miami-Dade County paid about $75 million in July to terminate a swap on its water and sewer bonds after the credit rating of an insurer guaranteeing the debt was cut. It plans to pay an additional $40 million to $50 million, following a refinancing this month. New York paid $44.6 million as of Sept. 30 to unwind swaps after they failed to protect the state when the interest on auction-rate securities surged.
[...]
http://www.informationarbitrage.com/2008/11/the-seduction-of-municipal-derivatives-just-dont-do-it.html
The Seduction of Municipal Derivatives: JUST DON'T DO IT
Bloomberg just ran a story on municipalities entering into derivatives contracts to help finance budget deficits. I've seen this movie before about 15 years ago, and I can tell you how it ends: in tears. As someone who spent much of my career in the realm, I can and have provided examples of the prudent use of derivatives: primarily, as risk management tools for issuers. The problem is, these municipalities are neither hedging anything nor do they truly understand the ramifications of their actions.
Without getting too complicated, counties, cities and states who feel desperate sometimes sell massive amounts of optionality to investment banks, with large embedded spreads for the dealers, and hope and pray that the options they've sold don't move in the money. Problem is, they almost always do. My fervent belief is: hope and prayer should not play a role in municipal finance (or in the White House, for that matter). If there are fundamental problems with balancing the budget, deal with it head on. But there is never a free lunch, and the pains of unwinding disastrous derivatives transactions can burden local governments for a generation.
[...]
I think everything is explained in the two links. So what are your views? Who are the bad guys here? How would you prevent it - for some local government departments, these instruments might be the only way to keep their jurisdictions running. Is it perhaps because of rules on how they can run their budgets, including deficits in bad times when their revenue streams dry up?