Jackson Jambalaya

Earlier posts:
Jackson paying $4 million in fees for bond deal
Will Jackson become Jefferson County, Alabama?

Now that I've blogged a bit about Jackson's foolish decision to refinance its bonds with interest rate swaps based on adjustable rates (just think of refinancing your house with an adjustable rate. Same concept to some degree), its time to see how much carnage there is among municipal balance sheets across the country thanks to these financial weapons of mass destruction. Buckle yourself in and have a drink, you're going to need it.

New Castle School District, PA
"On Sept. 25, the week after Lehman Brothers Holdings Inc. collapsed, the New Castle Area School District's interest rate on $9.7 million of financing arranged by JPMorgan hit 10.6 percent, more than doubling since the month began, as investors demanded skyrocketing returns for municipal debt" interest rate doubled

Philadelphia International Airport, PA
"In April 2002, Philadelphia International Airport entered into a high-stakes derivative trade with JPMorgan. The airport got $6.5 million; JPMorgan acquired the right to put the bank into an interest-rate swap on $189 million of bonds.
JPMorgan took in $4 million-$4.5 million on the deal in fees, according to LeCroy's SEC testimony. That was 10 times what the bank earned for underwriting a floating-rate-bond issue for the airport after the bank exercised the option.
The deal has turned out terribly for Philadelphia. In June 2008, the interest rate on the floating-rate bonds the airport issued surged to 7.2 percent from 1.8 percent the week before, after MBIA Inc., the company that guaranteed the bonds, lost its AAA credit rating.
The rate on the debt reached a high of 10 percent on Sept. 23.....
Philadelphia officials say they don't really have the choice of canceling the swap. Based on prices at the end of September, termination would cost Philadelphia about $24.4 million, according to the city. That's almost $20 million more than what it received in 2002..."

Louisiana
"the state has issued $1.9 billion in bonds since 2002 and plans another $985 million in bonds this year and next.
The state gambled and lost on a TIMED bonds "interest-rate" swap with Wall Street amid the credit crunch last year, and faces a possible termination penalty of more than $130 million if it can't sell those bonds by May 1...." Tick...tick..tick

Augusta, GA
"Augusta Mayor Deke Copenhaver says he doesn't plan to sign documents authorizing a financial transaction designed to squeeze some extra profit from the city's $160 million utility bond issue.. Augusta will be charged about $3 million in fees on its swap....." Same verse, different city

Reading, PA
"The Reading, Pennsylvania, school district, which has 18,323 students, this week must pay $230,000 to Deutsche Bank AG, Germany's largest bank, because it's on the losing side of a wager that long-term interest rates will rise faster than short- term interest rates... its adviser said the transaction may earn the district $16 million by 2034.
While Reading's taxpayers are liable for the loss, bankers and advisers already have pocketed $1 million in fees for arranging the swap.." 550 Mercedez sedans

Lewisburg, TN
"Everything was fine until January, Phillips said, when the town was saddled with annual interest payments that had quadrupled to $1 million, and the amount of time the city had to pay off the bonds was reduced from 20 years to seven years....." AP Story

Claiborne County, TN
"Michael Tuten, accounting and finance manager for Claiborne County, said Morgan Keegan in 2007 advised entering into a derivatives deal on an existing $18 million bond to pay for a new school.....
But interest rates began to inch up, and he said the company told county officials earlier this year that they had only a few weeks to refinance the entire bond or make a quadrupled payment of $700,000..."

Indianapolis, IN
Nearly 1 million Indianapolis Water customers likely will see their rates go up this summer because the city-owned utility faces a penalty of up to $100 million after entering into some of the risky variable-rate financing deals at the heart of the country's economic meltdown
The Indianapolis Bond Bank, which set up the deals in 2005, now will have to pay a penalty of $80 million to $100 million to extract the utility from interest-rate swaps attached to the bonds...
Refinancing seems to be the only choice: The city otherwise would face annual payments of $44 million, which it can't afford....
Interest rates on that debt rose from 3.5 percent to 9.5 percent in the past two years, forcing the utility to make $20 million more in interest payments in 2008 than in 2007...." Indy Star story

New Orleans, LA
"New Orleans is suing Ambac Financial Group Inc. for breach of contract, alleging the bond insurer's ``greed'' and ``mismanagement'' caused it to lose its AAA credit rating, costing the city at least $2 million in extra debt service.
The complaint, filed in federal court in Louisiana on July 17, said the city wouldn't have issued $171 million of taxable floating-rate pension bonds in December 2000 and bought an interest-rate swap, without Ambac's assurance that its policy would allow the city to successfully sell the debt.....
New Orleans's overall interest cost on the pension bonds is 10.5 percent, adding about $400,000 a month in debt service, the complaint said.
The city would have to pay between $26 million and $31 million to terminate the swap, and faces accelerated amortization and redemption costs on the pension bonds, which are now held by JPMorgan Chase & Co., after UBS stopped the remarketing, the complaint said..." Bloomberg

Houston, TX
"Houston wound up paying 15 percent interest on the new securities, not the money-market rates city officials had anticipated...." Bloomberg

Jefferson County, AL
"Jefferson County would have to pay $735 million to end backfiring swap agreements that were designed to save the county money on its sewer debt - a sum so large it could complicate talks with creditors on a debt settlement.."
Al.com

Erie, PA
"What New York-based JPMorgan Chase didn't tell them, the transcript shows, was that the bank would get more in fees than the school district would get in cash: $1 million. The complex deal, which placed taxpayer money at risk, was linked to four variables involving interest rates. Three years later, as interest rate benchmarks went the wrong way for the school district, the Erie board paid $2.9 million to JPMorgan to get out of the deal, which officials now say they didn't understand...." Bloomberg


Any questions?