Wednesday, November 10, 2010

States And Cities Pay Wall Street $4 Billion To Exit Bad Deals

Cities and states have had to pay Wall Street firms $4 billion since 2008 to get out of complicated interest rate deals that went sour, Bloomberg reports.

After more than a decade of selling deals that were supposed to help local governments fund public projects, banks and insurance companies are now raking in payments as already-strapped cities and states try to exit the agreements. According to Bloomberg's investigation, the payments, to exit a total of more than $500 billion worth of deals, have soared to over $4 billion. They come at a time when states face budget shortfalls of about $72 billion, according to the National Conference of State Legislatures.

The deals, called interest rate swaps, are designed to allow a borrower (in this case, the local government) to pay a low and consistent rate of interest on their debt. What once seemed attractive, though, is now corrosive: In the wake of the financial crisis, Wall Street firms failed to uphold their end of the bargain and weren't able to cover the governments' interest payments, Bloomberg reports. The governments want out, and it's costing them dearly. In New York, for instance, the state initially saved about $203 million from the swaps, but it has now paid about $247 million to exit, Bloomberg says.

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