A new Boston Globe story, The T’s long, winding, infuriating road to failure, purports to be “the true story of the breakdown,” a “a decades-long tale of grand ambitions and runaway costs.”
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Funny how this 2500 word article makes nary a mention of the huge losses that the Massachusetts Bay Transportation Authority made, along with many other easily duped transit authorities, on swap transactions that went massively against them in an environment of seemingly permanent low interest rates.
A March 2012 article in Alternet by Tom Ferguson provided an overview. Key sections:
The Refund Transit Coalition, a coalition of unions and public interest groups, put out a study that documented in stunning detail how Wall Street banks have for years been hustling American cities, states, and regional authorities out of billions of dollars. But save for Gretchen Morgenson’s “Fair Game” column for the New York Times, the study drew almost no attention…
Its starting point will be familiar to anyone who recalls the debate over financial “reform” of the last few years. In the bad old days of pre-2008 deregulated finance, bankers started pedaling hot new “structured finance” products that they claimed were perfect for the needs of clients who had thrived for decades using cheaper, plain vanilla bonds and loans. The new marvels – swaps and other forms of so-called “derivatives” whose values changed as other securities they referenced fluctuated in value – were often complex and frequently not priced in any actual market. Their buyers thus had difficulty understanding how they really worked or how they might be hurt by purchasing them.
In many documented cases, buyers also had only faint ideas about how profitable these products were to the houses selling them. One befuddled Pennsylvania school board, for example, diffidently quizzed J.P. Morgan Chase: “The school-board official knew they were getting $750,000 for entering into a ‘swaption’ with J.P. Morgan Chase & Co. They wanted to know what was in it for the bank. They wanted to know the price. They seem like reasonable requests. ‘I can’t quantify that to you,’ the banker told them. ‘It is not a typical underwriting and I can’t quantify that for you and there’s no way that I can be specific on that.'”
One popular product involved an “interest rate” swap built into a bond deal. In these, as the Transit study explains, some hapless municipal authority brings out a bond and commits to making fixed payments to buyers. That sounds like any other old fashioned bond offer. But here’s the twist. In the swap version, the bank offers, for a handsome charge, to pay a variable fee to the issuer of the bonds. The idea was that the money could be used to make payments owed to the bond buyers. Payments were supposed to vary with the course of interest rates. The contrivances were heralded as protecting issuers against a rise in rates and saving them money on their payments.
But there was a catch: If rates fell, then banks could make out big, while issuers faced disaster, because the latter still had to make the fixed payments on their bonds, while the banks’ payments would shrink as rates fell. In effect, issuers were gambling on interest rates and betting they somehow knew better than the banks what was going to happen. And, ah, yes, the final touch: With old style bonds, you could refinance if rates fell; with the new fangled derivatives, the banks made sure to impose huge termination fees…
The Refund Transit study concentrated on local transit systems. Some of its numbers are stunning. The study pegged annual swap losses at the Massachusetts Bay Transportation Authority (Boston area) at $25.8 million and suggested that the MBTA will “lose another $254 million on these swaps” before they lapse. The study added that the MBTA was losing money on swaps even before the crisis, with total losses running in the “hundreds of millions” of dollars.
And it is not as if the Globe can feign being unaware of the swap losses. It ran this editorial, MBTA needs better terms on interest swaps, in June 2012:
At the time, it seemed like a way to cut down on crushing debt costs. Yet the millions that the MBTA is paying to banks because of ill-considered interest rate swaps shows why the agency never should have entered into these complex financial deals — and why it should seek better terms now.
The T entered into interest-rate swaps in the early 2000s, when interest rates seemed low and were expected to rise. In these deals, the T issued bonds to banks and agreed to pay them back at a fixed rate. In exchange, banks would pay the T at rates that varied with the market. The swaps turned into bad bets when interest rates dipped to historic lows as a result of the financial collapse. Now the T, like transit agencies across the country, is paying down debt at rates far higher than what’s available on the market, costing the T almost $26 million each year, according to a study from a group called the ReFund Transit Coalition. The T can only refinance if it pays a huge exit fee — a step that other public transit agencies have taken.
As lawmakers scrape around for money to close current deficits and prevent future ones at the MBTA, the transit agency and lawmakers should try to find ways out of the swaps. While the banks will likely argue that these are contracts that can’t be broken, the T should still try to renegotiate. Public agencies in California, including a San Francisco museum and the city of Richmond, have successfully renegotiated swaps by stressing their fiscal struggles, while Oakland is currently in swap refinancing talks with Goldman Sachs.
The T could also note that banks profiting from swaps — Deutsche Bank, JPMorgan Chase, Morgan Stanley, and UBS — all benefited from the federal bailout as the nation plunged into recession. A troubled but essential transit agency deserves the same consideration in its time of need.
You would think, given that the Globe advocated renegotiating the swaps more than two years ago, that its account would include why the swaps were not restructured or settled. Was in inaction on the MBTA’s part, or that they got so much pushback from their counterparties that they saw it as too difficult to get done on advantageous terms?
The omission of how the MBTA was fleeced in a story that focuses heavily on financial mistakes lets Wall Street off easy. And the Globe has no public editor or ombudsman to take complaints about this gaping hole in its account. So much for its commitment to journalistic ethics.
Particularly if you are in Massachusetts, please call or e-mail the Globe’s managing editor for news, Christine Chinlund and tell her the Globe is showing bias by ignoring the role of Big Finance in the MBTA’s tsuris.
Chinlund’s e-mail is: [email protected] and her phone is 617 929-3134.
The other approach is to show up the Globe by getting the word out through social media. Tweet this post and link to it on FaceBook. If the press refuses to do its job, it’s time for the Web-savvy to do it for them.