Developing Story: Bank Swaps and Philadelphia

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As Sharon Ward wrote yesterday, the Pennsylvania Budget and Policy Center put out a new report documenting the millions made by large financial institutions like Wells Fargo, Morgan Stanley, and Goldman Sachs off interest rate swaps negotiated with the City and School District of Philadelphia. Those swap deals have cost the city and school district $331 million in net interest payments and cancellation fees. If interest rates continue to remain low, still-active swaps could cost the city another $240 million in future net interest payments.

Here’s a quick look at how the story is being told in the daily news clips.

Philadelphia should demand that Wall Street banks refund half a billion dollars lost or owed by city agencies on interest-rate swap contracts that were supposed to cut city borrowing costs but instead swelled budget deficits at the worst possible time, a Harrisburg-based advocacy group and its labor-union allies say. …

Swaps and other complex financial arrangements used to be off-limits to local governments. But in the late 1990s, “the financial-services industry lobbied Washington to deregulate these instruments,” center executive director Sharon Ward said. “Then they came to Harrisburg and lobbied in 2003 for legislation that removed the ban.”

 

“Paying back termination fees to the school district as an act of goodwill could put students back in music and gifted programs,” the organization said in the report. …

“Renegotiating active swaps with the city to more equitable terms could alleviate future cuts to the city budget,” the group said in the report. “It’s only fair.”

 

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.”

 

Interest rate swaps are complex, risky financial agreements that dozens of local governments and school districts throughout the state entered into before the economic meltdown.

At a press conference this afternoon, the Policy Center’s director Sharon Ward said the banks should return some of their expensive cancellation fees to the city and School District, as well as renegotiate the current swaps. She argued that they should be “good corporate citizens,” especially because taxpayers bailed them out.

 

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