US Municipalities Trapped in Compex Financial Products
April 8, 2009
A NYTimes piece discusses how municipalities in Tennessee, towns as small as 11,000, became involved in adjustable rate bonds and interest rate swaps. When the bond insurer, Ambac, went bankrupt, the bonds were downgraded which significantly increased the interest rates and repayment burden. Municipal bonds are used to raise money to build things such as schools or firehalls, in small communities. Administrators of local governments who make financial decisions in these places have little knowledge of the principals of complex risk management. The piece focuses on problems of disclosure – how courses to inform buyers called ‘swap schools’, were run by the very institutions that were selling them the financial products. More importantly, perhaps, the piece exposes the imbrication of such products within the basic fabric of the US.