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AFR Statement on ReFund Transit Coalition’s Swaps Report, “Riding the Gravy Train”

Submitted by on June 7, 2012 – 9:57 am


CONTACT: Erin Kilroy at 202-466-1885



AFR Statement on ReFund Transit Coalition’s Swaps Report, “Riding the Gravy Train”


Washington DC – This report does a valuable service in documenting $529 million in annual swaps payments being made by U.S. transit systems, and the state and local governments that fund them, to Wall Street banks. This is only one example of the abuse of public entities by Wall Street derivatives dealers.

Exploitative swaps deals linked to complex structured transactions have been devastating to municipal borrowers and other public entities across the country. The most well-known example is the Jefferson County bankruptcy – the largest municipal bankruptcy in U.S. history. But as this report and others document, the Jefferson County case is only the tip of the iceberg. Across the U.S., taxpayers are making excessive and unreasonable payments to banks in swaps deals, sending billions of taxpayer dollars to Wall Street instead of using them for local needs..
One important part of the solution lies in this report’s recommendation that legacy swaps deals be renegotiated. Not only have circumstances changed dramatically because of the financial crisis, but such deals in many cases contained hidden long-term risks that were not properly represented when the instruments were sold. Going forward, in the Dodd-Frank Act Congress enacted new business conduct rules for derivatives dealers as a response to the exploitation of public entities in complex derivatives transactions. These new standards are straight-forward and commonsensical. They include a duty for the dealer to respect the interests of the customer when providing advice and recommendations, a requirement for the dealer to disclose the full price and risks of the swaps transaction, and a requirement that the customer retain a genuinely independent and qualified advisor to help in their negotiations with the dealer.

There has been tremendous industry lobbying against vigorous implementation of these statutory changes. Unfortunately the rules thus far put in place do NOT fully implement the law, and will make it much too easy for abusive and one sided deals to continue. Examples like those in this report show how important it is that regulators reconsider this decision and truly implement tough requirements for swaps dealers to respect the interests of their municipal customers. Until this happens, taxpayers will be vulnerable to the kinds of problems documented here.