How Wall Street took $331 million from Philly and its schools

[phantom power]

Financial deals with Wall Street firms including Wells Fargo, Morgan Stanley, Merrill Lynch, Citigroup and Goldman Sachs have, according to a new report by the left-leaning Pennsylvania Budget and Policy Center (PBPC), cost the city and School District $331 million—and they stand to lose another $240 million. The School District has paid out $63 million to Wall Street banks just to cancel five agreements, and the city has paid an estimated $52.4 million-plus.

The interest rate swaps, which you can read more about in the PBPC report or at some in the articles I link to below, ostensibly were signed to protect the city from having to pay higher interest rates. When interest rates tanked after the recession, however, the city and School District were left holding the bag and had to pay the old high interest rates, losing millions—or pay millions to cancel the agreements.

Our city and schools have already been cut to the bone: the city cut nearly $100 million during 2008 and 2009, while the School District faced a $629 million budget shortfall that was closed by serious teacher and staff layoffs and by big cuts to programs. More cuts are expected this year.

Pennsylvania Auditor General Jack Wagner called the swaps “highly risky and impenetrably complex transactions that, quite simply, amount to gambling with public money. Moreover they are susceptible of being marketed deceptively and they principally benefit the investment banks and multitude of intermediaries who sell them to relatively unsophisticated public officials.”

This “gambling with public money” was legalized by the Commodity Futures Modernization Act of 2000 at the height of the deregulatory frenzy that laid the groundwork for our current predicament.

http://www.citypaper.net/blogs/nakedcity/How-Wall-Street-took-331-million-from-Philly-and-its-schools.html

[JackRiddler]

1. Kicking for attention.

[girl gone mad]

2. k & r

[kenny blankenship]

3. This is how the free market "allocates capital efficiently"

Anybody you could snooker out of 330+ million dollars wasn't going to be using it very wisely!
Q.E.D. Thus is our faith in the Invisible Hand, once more, strengthened and justified.

[Travis_0004]

4. These are transactions that take place all the time.

I would also argue that when used correctly, interest rate swaps should lower risk.

A school gets its revenue from taxes. When the economy is bad (and interest rates are low), taxes are down, so I would argue that variable rates are good for most governments. When the economy is good, taxes are higher, and they can afford to pay higher interest rates.

Some corporations (like General Mills), have steady profits, so they want to match inflows such as income with outflows (interest expenses), for them I would argue that fixed rate debt is probably a good idea.

I think a lot of people here don't understand derivatives, and as such look down on them, but they have a legitimate place in business. Now you could argue (and I would agree!), that the school shouldn't have made this deal, but that doesn't make the swap bank evil. The amount of money these schools are 'loosing' from this deal is pennies in comparison to fixed rate government bonds, many of which have interest rates that are very high because they were issued several years ago. Would you argue that I am ripping off the government, because I demand they pay my bonds the interest rate they agreed to several years ago?

[stufl]

5. Products created by Wall Street firms are hockey pucks

in a zero sum game. In such a game, there is always a clear winner and an equal loser. Wall Street does not often lose. If they get stuck with "POS" products (that's WSW jargon for "pieces of sh**." It does not mean "Positive.&quot they sell them to unsuspecting clients. Those clients used to be the object of Wall Street effort. No longer. Why anyone does business with any of the remaining investment banks is beyond me.