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Billions in Municipal Losses Later…Sorry

Posted by Larry Doyle on March 25, 2009 8:03 PM |

The municipal bond sector has always been conducive to a “pay to play” mentality. Picture a municipal executive, compensated in a high 5 figure range, making a decision on a multi-million dollar bond transaction in which Wall Street underwriters were generating millions in fees. If that scenario is not ripe for abuse, I don’t know what is. The “pay to play” game has been going on for years in municipal finance.

Well, with the launch and growth in municipal derivatives, it appears that the “games” likely continued. Wall Street firms certainly booked huge profits. Municipal executives very likely received under the table payments. Taxpayers  got screwed.

Where were the regulators in the process? Under pressure from Wall Street, politicians, and lobbyists, the regulators were never able to make the case for proper oversight. Well, it is very hard to believe that it was just Wall Street making the dough in this equation. 

Who was minding the store? Nobody!! Bloomberg reports,  

Overseeing Derivatives

Doe said board members and staff told him Congress didn’t give the MSRB power to oversee derivatives.

“Every time I talked to the board about swaps, I made it clear that the MSRB had no authority to take action,” said Taylor, in an e-mail. “My ‘regret’ is that MSRB would not speak out loudly that swaps were going to cost taxpayers a bundle if issuers did not clearly understand what they were doing.”

Taylor said interest-rate swaps increased in the final years of his tenure, coinciding with a decline in fees for underwriting bonds. Fees fell to $5.27 per $1,000 of municipal bonds in 2007 from $7.07 in 1998, according to Thomson Reuters.

Municipalities bought swaps to limit their risk to interest-rate movements, usually by locking in a fixed borrowing cost on variable-rate debt or in other cases getting cash payments upfront. Now some issuers are finding they must pay fees to unwind swaps when credit ratings are cut or interest rates move against them.

Bloomberg’s full report on Municipal Markets Regulator ‘Regrets’ Enabling Losses.

Sorry….regret….that’s all the taxpayers get. 


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