To the Editor:
I’m so glad you’re still writing and questioning what is going on at City Hall (March 21-April 3 Commentary: “All of a sudden, tracking money is a big city problem”).
I do have a Harvard MBA, as it happens, but as we both know, applied common sense and curiosity are the commodities that are always in short supply when conflicts of interest abound, as they often do in municipal finance.
I don’t know if you’ve yet turned your attention to the sewer bonds and interest rate swaps. These have garnered national attention to Birmingham/Jefferson City (Alabama) — NYT (New York Times) and WSJ (Wall Street Journal) articles — and I gather our own fair city may have similar, though perhaps not so dire, troubles. This is an area that needs sunshine or Atlanta could get deeper and deeper in the mire.
Here are comments I shared with a friend who dug up the fact that Atlanta’s four swap deals, all with UBS (an international financial firm), showed a negative NPV (net present value) as of the last report in September 2007.
I’d note that the swaps – presumably interest rate swaps — in Atlanta’s case do not exceed the value of the bonds. So they are not double bets on interest rate moves like Birmingham made. Yet, as the NYT comments, in times of turmoil these instruments do not behave as advertised. Let’s hope the unexpected cuts in short rates and the stubbornly high long rates that we are seeing these days do not trigger a big liability for Atlanta. (It) depends on the terms of the swaps.
Also I’d note that UBS is, along with Citigroup, the big bank with the largest write-downs to date for mortgage backed securities gone sour. It is conceivable that they could go belly up, in which case Atlanta has paid for an interest hedge and will get no protection in return. Why would we put all our swap eggs in one basket?
It is a near certainty that Atlanta has enriched numerous investment bankers with fees for putting these swaps in place. It would be out of character if this had been done on a competitive bid basis.
The negative NPV just means, as I understand it, that Atlanta would have been better off by that amount without the hedge, at the time that the figure was computed. We’re paying more than we’d have paid without the swap. With the Fed slashing short rates in the past few months, the negative NPV could be much more today.
However, it would not be right to blame the city for this outcome in itself. It would have been risky to take on a floating rate liability without limiting Atlanta’s exposure if rates went sky high. To criticize this would be like blaming someone for insuring their house last year because it did not burn down.
What should be vigorously questioned is whether it is prudent for the city to enter into such complex deals rather than just borrowing via plain-vanilla fixed-interest bonds. This is a city that cannot even figure out what it is spending from the general fund. What business has it got playing with Wall Street artists?
Any possible interest saving is eaten up by the risk that the city did not understand what obligations it was accepting in these swaps, risk of extreme outcomes, risks of counterparty failure, fees to i-bankers, difficulties in correctly accounting for the swaps (marking to market) etc.