from Bloomberg:
Citigroup Leads Wall Street Drive to Hurt Taxpayers (Update2)
By Michael McDonald
May 9 (Bloomberg) -- Taxpayers from Massachusetts to California are paying Wall Street banks to end derivative contracts gone bad as they exit the collapsing auction-rate bond market, with penalties in some cases topping $10 million and compounding the pain of rising borrowing costs.
Sacramento County, California, paid Morgan Stanley $5 million to cancel an interest-rate swap agreement when it refinanced $79.5 million in auction-rate securities last month. The fee added to the cost of the bonds after the rate on the securities more than doubled to 9.8 percent in March as dealers stopped supporting the market.
``It's kind of like damage control,'' said Chris Marx, the county's debt officer. ``It didn't make a lot of sense to us to leave the swap in place.''
The breakdown of the $166 billion market where municipal rates are typically set through bidding run by a dealer is squeezing borrowers already hurt by the first decline in state sales-tax revenue in six years, according to the Nelson A. Rockefeller Institute of Government in Albany, New York.
States, cities, hospitals and colleges face penalties exceeding $10 million to terminate swaps that failed to protect them against higher rates, according to interviews with borrowers and advisers. That's on top of the $1 billion in fees they're paying to dealers to help sell bonds that would replace auction-rate securities they sold, based on industry averages.
`Tough Lesson' ``Some of the termination fees are ugly,'' said Christopher ``Kit'' Taylor, former executive director of the Municipal Securities Rulemaking Board, the market's regulator. ``It's going to be a tough lesson for a lot of issuers.''
Though no data exists on how many municipalities entered into swaps, it was ``the trade du jour,'' said Robert Fuller, a financial adviser who runs Capital Markets Management LLC in Hopewell, New Jersey. Many issuers sold auction-rate securities and then agreed to swaps with their bank, leaving them with a fixed rate derived from the taxable bond market that was often lower than conventional tax-exempt rates, he said. .......(more)
The complete piece is at:
http://www.bloomberg.com/apps/news?pid=20601109&sid=arigOxlIiRm4&refer=home