Friday, January 9, 2009

Did Municipalities Overpay For Swaps and Swaptions?

The S.E.C., the Justice Department, and various states' Attorneys General are investigating what may be "one of the longest-running, most economically pervasive antitrust conspiracies ever to be uncovered in the U.S."

Three federal agencies and a loose consortium of state attorneys general have for several years been gathering evidence of what appears to be collusion among the banks and other companies that have helped state and local governments take approximately $400 billion worth of municipal notes and bonds to market each year.

E-mail messages, taped phone conversations and other court documents suggest that companies did not engage in open competition for this lucrative business, but secretly divided it among themselves, imposing layers of excess cost on local governments, violating the federal rules for tax-exempt bonds and making questionable payments and campaign contributions to local officials who could steer them business. In some cases, they created exotic financial structures that blew up.

People with knowledge of the evidence say investigators are not just looking at a few bad apples, but also at the way an entire market has operated for years (emphasis added).


Banks have exacerbated the damage to many municipalities by selling them unnecessary interest rate swaps that have driven some cities and counties to the verge of bankruptcy:

The use of derivatives in connection with municipal bonds has grown rapidly in the last five years. The packages are presented as money-savers to the municipalities, which may want to protect themselves against interest rate changes. But over the last year, as turmoil spread through the credit markets, some of the derivatives have blown up, leaving local governments stuck with unexpected costs.

That happened in Alabama, where Jefferson County linked an extraordinary number of derivatives, called interest-rate swaps, to its bonds, in some cases with the help of CDR Financial. Despite publicized concerns about whether improper payments to certain officials were behind the swaps, the county insisted the swaps were saving money. Last year, the derivatives failed, leaving the county with vast bills. Jefferson County is now at risk of declaring what would be the biggest governmental bankruptcy in United States history.

Even in places where the bonds and derivatives are performing as expected, irate government officials are finding they may have overpaid for various services and have inadvertently broken federal tax rules. Again and again, proceeds from tax-exempt bonds appear to have improperly generated investment income for banks and insurers.

Among the governments that have sued these financial firms are the cities of Chicago and Baltimore; Oakland and Fresno, Calif.; the state of Mississippi; and a number of counties, school districts and at least one water and sewer district. The lawsuits were consolidated in November, in Federal District Court for the Southern District of New York (emphasis added).


Municipalities should examine prior bond offerings and interest rate swap purchases very carefully to see if they have been victimized by this scam.

7 comments:

Sunny Jonson said...

I had no trouble navigating through all the tabs as well as related info. The site ended up being truly simple to access. Intraday Nifty Future Tips

jack jonson said...

It’s really a nice and useful piece of info. I’m satisfied that you simply shared this useful info with us. Please stay us up to date like this. Thanks for sharing.
Commodity tips
Stock Market
Share Market
Nse Tips
Bse Tips

Alex Jonson said...
This comment has been removed by the author.
John Cruse said...

A good informative post that you have shared and thankful your work for sharing the information. Got some appealing information and would like to give it a try. Applaud your work and keep sharing your information.Really impressed! Everything is very open and very clear clarification of issues.
Call Option || Option Tips || Stock Option Tips || Options || Nifty Options

Sunny Jonson said...

This is a great post ! it was very informative. I look forward in reading more of your work.
Share market tips
Share and Earn

Commodity Tips | Stock MarketTips said...

This is my first visit to your blog.Your blog provided very important information to work on.I wanted to thank you for this special read.
share market
stock market
Indian Stock Market Tips

property mash said...

I like concept of your post. Very creative post. Best of luck and waiting for some new ideas. I am looking for such useful information and I found here a lot of it.
Buy Property
Sell Property
Invest in Property
Find real estate agent