With Swaps, Riding the Gravy Train Is Expensive

A. Rashad Abdel-khalik

Chapter 27 in Brazen:Big Banks, Swap Mania and the Fallout, 2019, pp 327-329 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Transit authorities generate revenue by providing services to the public in addition to receiving public funding from state and local governments. These agencies also borrow money by issuing bonds (in the municipal-bond market) to help provide the funds needed to support their operations. At the start of the Swap Mania in the late 1990s, big banks dispatched their swap sellers to give the financial administrators of these agencies the same song and dance they had performed repeatedly. The same song and dance meant emphasizing the benefits of entering into swap contracts: promises to lower the cost of borrowing and to manage interest-rate risk. Having a healthy degree of naïveté and inexperience when it comes to financial engineering, managers of transit authorities believed the promises made and agreed to switch their bonds from the conventional fixed rates to variable (floating) rates and simultaneously enter into swap contracts with these same banks to pay fixed and receive variable…

Keywords: Swaps; Interest Rate Swap; Unconscionable Contracting; Termination Penalties; Embedded Costs; Paying for Nothing; Gambling; ISDA; Master Agreement; Deceit; Inadequate Disclosure; Hidden Costs; Zero Sum Game; Wealth Transfer; Paper Chasing Paper; Floating Rate; Synthetic Rate; Credit Risk; Demonstrations; Water Shut Off; Union Class Action Suit; The LIBOR Scandal; Non-Profit (search for similar items in EconPapers)
JEL-codes: E43 E44 (search for similar items in EconPapers)
Date: 2019
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