AFR in the News: Americans Proving Clueless Paying Wall Street $20 Billion for Broken Swaps

Americans Proving Clueless Paying Wall Street $20 Billion for Broken Swaps- Darrell Preston and Aaron Kuriloff (Bloomberg)
January 13, 2012

“Seven months after Hurricane Katrina ripped holes in the Superdome’s roof in 2005, Louisiana State Bond Commission members made what they were told would be ‘the best of a bad situation’ in financing the stadium’s renovation.  Acting against the recommendation of their staff, the commissioners voted for a Merrill Lynch & Co. plan to use debt and interest-rate swaps to pay for the job. While the deal helped keep the National Football League’s New Orleans Saints from leaving town — and the arena got new scoreboards while 12,000 seats were converted to luxury class — taxpayers became the losers for supporting a winning team. … Government overseers often didn’t understand that the market was controlled by the banks that sold the derivatives they claimed would minimize risk, and that could impose penalties when deals unraveled.  From Portland to Puerto Rico, officials gambled with sewer, road, school, pension and stadium financing. Municipal securities made up about half of the $330 billion auction-rate market when it collapsed in February 2008, data compiled by Bloomberg show. Taxpayers have forked over $20 billion in fees for swap agreements in the past five years, according to Andrew Kalotay, chief executive officer of the debt-management firm Andrew Kalotay Associates Inc. in New York. Public officials, Kalotay said, ‘think they know what they’re doing, and they screw up.’ Few have acknowledged their mistakes. ‘No one wants to say out loud they’re unsophisticated,’ said Marcus Stanley, policy director of the Washington-based nonprofit Americans For Financial Reform, a coalition of unions and civil rights and consumer advocates.” Click here for more.