Thursday, April 3, 2008
Municipalities and TANSTAAFL
"Already reeling from bond-insurance trouble and faltering credit markets, municipalities face another concern: A popular derivatives strategy has suddenly turned sour. The trade, known as an interest-rate swap, was supposed to help local governments, schools, museums and hospitals lower borrowing costs. During the past three years, municipalities have entered into more than $500 billion of interest-rate swaps, according to the Swap Financial Group, a South Orange, N.J., adivisory firm that specializes in these derivatives. ... Still, analysts say swaps can be a valuable tool for municipalities. "There's always a speculative element when you do a swap,' said Peter Block, a public-finance analyst at [S&P]. 'But in most cases, it's a calculated risk.' Yet, others have long worried that as these derivatives grew more complex, municipalities may have failed to fully understand the risks. ... 'Governments hate to raise taxes,' said Robert Fuller, principal of Capital Markets Management, financial advisers specializing in muni debt. 'If they can financial engineer a way out of raising taxes through the use of swaps, most will want to do it'," my emphasis, WSJ, 22 March 2008.
Amazing. The alchemists are back at work. Robert Fuller is a purveyor of rainbow stew, see my 28 October 2007 post. If a little is good, is more better? No? Why not eliminate all taxes with swaps? Well Fuller? TANSTAAFL? "There ain't no such thing as a free lunch".