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Money For Nothing – New York Interest Rate Swaps

12/13/2-11

New York, NY - A new report released today by UnitedNY, the Center for Working Families, and the Strong Economy for All Coalition shows that while the bailed-out banks make hundreds of billions of dollars off of interest rate swaps, taxpayers get left holding the bill and government and other public entities, like the MTA, are forced to make layoffs and reduce services. The coalition of labor and community groups called on the MTA to work to renegotiate or push for the cancellation of these deals to help prevent future layoffs and service cuts.

Interest rate swaps – complex financial products engineered by Wall Street that most people likely have never heard of – have turned into a major stream of cash moving directly out of public budgets and into the pockets of the biggest banks. Swaps were sold to government officials as a way to lower the costs of borrowing by, in essence, converting variable interest rates on municipal bonds into fixed interest rates. However, these swap deals have instead grown into a huge liability, draining away money that could otherwise go to maintain essential services, close budget gaps, retain good jobs, and shore up our crumbling infrastructure.

EXECUTIVE SUMMARY

Interest rate swaps — complex financial products engineered by Wall Street that most people likely have never heard of — have turned into a major stream of cash moving directly out of public budgets and into the pockets of the biggest banks. Swaps were sold to public officials as a way to lower the costs of borrowing by, in essence, converting variable interest rates on municipal bonds into fixed interest rates. However, these swap deals have instead grown into a huge liability, draining away money that could otherwise be used to maintain essential services, close budget gaps, retain good jobs, and shore up our crumbling infrastructure.

Thanks to historically low interest rates — brought about by federal action on behalf of the banks as part of the bailout that started in October 2008 — New York State, New York City, and other New York public entities are today paying over $236 million per year to the big banks on just a few of these swap deals.1

That’s money for nothing going from taxpayers to the big banks. Right now, government officials seem to have no way out of the golden handcuffs, unless they make the agonizing choice to pay nearly $1.4

billion to terminate these harmful contracts. What’s worse, future payments on these swap agreements — some of which last up to thirty years — promise to leech away at public services and funds for decades to come.

The Metropolitan Transportation Authority (MTA) provides a striking example:

•    Since January 2000, the MTA has already paid out a net $658 million to banks under these swap agreements, experiencing losses that spiked after interest rates were slashed as part of the federal bank bailout strategy.

•    The MTA’s net swap payments in 2010 alone, if spent on transit instead of payments to banks, could have spared the riding public from deep subway and bus service cuts and cleaning reductions, as well as 1,012 MTA workers at New York City Transit from layoffs and the elimination  of 749 positions2  associated with these cuts — with over $40 million to spare. (See Table 4.)

•    The MTA is projected to pay banks in 2011 nearly $118 million in net swap payments. This is money the MTA could instead use towards restoring its 2010 service cuts.

•    The MTA remains on the hook for nearly $1.3 billion in payments to banks before its current swap agreements terminate — nearly half of which will not terminate until after 2030.

•    As of the end of September 2011, the MTA would have to pay $714 million in termination fees if it were to end its swap arrangements today — up from $408 million in June 2011, a mere three- month period — and refinance the associated bonds at the current lower fixed rates.

The economic collapse and federal bailout changed the “rules of the game” with respect to interest rates. Now taxpayers are suffering and governments are stuck with the old rules while banks are allowed to play by the new ones. We need one set of rules for everyone.

Banks should be held accountable for their part in crashing the economy, not rewarded with a second bailout under lucrative swap agreements.

Banks should:

1.   Renegotiate or cancel these deals at no cost to taxpayers.

2.   Be transparent about the deals that currently exist. Government officials should:

1.   Insist that big banks come to the table and renegotiate or cancel these deals, at no cost to taxpayers.

2.   Require a full accounting of swaps deals, affording the public with much needed transparency about bank dealings.

3.   Conduct business with those banks that agree to work cooperatively in cleaning up these deals that currently transfer tax dollars to a small portion of the private sector.

Read the rest of the report here Report on New York Swaps

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