Toxic Pre-Recession Bank Deals Haunt Struggling Transit Agencies

In 12 major cities, transit agencies are paying much more interest than the going rates, thanks to deals reached with banks before the financial collapse of 2008. Image: ##http://refundtransit.org/## Refund Transit##

In the midst of major funding crises and unprecedented demand, transit agencies across the country are paying hundreds of millions of dollars to big banks because of bad deals made in the pre-recession, pre-bailout days. That’s according to a new report from Refund Transit, a coalition of transit unions and community organizations calling for banks to voluntarily renegotiate these deals.

The financial products that got transit agencies in trouble are called interest rate swaps — deals that were supposed to protect transit agencies against increases in borrowing costs. Instead, after the economy fell off a cliff in 2008, interest rates are now at historic lows, and transit agencies are stuck paying many times the current competitive rates.

Refund Transit’s survey of 12 major transit providers found that public transportation agencies were overpaying by $529 million thanks to these deals, which were sold as a way to minimize risk and save money. Los Angeles’s transit system is losing $19.6 million annually compared to the interest rates they would otherwise be paying. Detroit — where low-income workers face up to three-hour transit waits and are occasionally stranded — loses $54 million annually. The state of New Jersey’s transit system loses $83 million, according to the report.

The Refund Transit coalition includes the Amalgamated Transit Union, the Transportation Equity Network, and a handful of grassroots community groups, and they are calling on banks to renegotiate.

“Banks sold these deals as insurance policies that would let taxpayers lock in lower interest rates without having to worry about rates shooting up in the future,” the organization says in the report. “However, these deals were actually more of a gamble than an insurance policy.”

Larry Hanley, president of the Amalgamated Transit Union, said banks should not be profiting from conditions they helped to create, especially since banks themselves were insulated from the economic crash by taxpayer funds.

“We got them out of their mess,” he said. “Today we are lending the banks money at 0.5 percent a year – the taxpayer is lending them the money – but then in turn, they are gouging the taxpayer through these agencies and through the city governments.”

Meanwhile, earlier this week, the city of Baltimore and the Tennessee Department of Transportation, acting as part of a class action lawsuit, settled a lawsuit against JP Morgan that charged the lender colluded with other major banks to manipulate interest rates downward — exacerbating losses for public entities who purchased this type of financial product.

  • Sad part is the bureaucrats at FTA encouraged these deals. When they imploded suddenly our frieds in D.C. rewrote history to duck responsibility or offer any meaningful (i.e. expensive) relef. Shame! Shame!

  • Anxiously Awaiting Bike Share

    Oy.

    1) if interest rates were high then no one would be complaining.  Fixed vs. Floating interest loans are always one of the great debates from mortgage requests to CFOs at Fortune 500 companies. 2) Saying the banks are costing transit agencies $X is like saying that the banks are costing me $Y of interest on my savings account because rates are no longer 3% but 0.5%.  I could take my money elsewhere if I wanted. Transit agencies could get their loans elsewhere if they wanted. 3) Lumping all banks together is a bit silly.  The interest rate swap could have come from some local bank that had nothing to do with the Lehman Brothers and AIGs of the world.  4) Just because “we” bailed out the banks doesn’t mean that they should just handover money to local governments otherwise “we” will have to bail them out again.

  • Ian Turner

    Seems to me that if transit agencies are going to place macroeconomic bets, they should be countercyclical ones, so that they pay more if their tax base is stronger and less otherwise.

  • Larry Littlefield

     “if interest rates were high then no one would be complaining.”
    If simple, cheap, fixed rate callable bonds had been issued, there would be on problem, but there would have been less commissions and bonuses on Wall Street.  First they sold the short sighted on variable rate bonds.  Then they pointed out that they had to pay for protection against interest rate increases, wiping out the savings and then some.

    And they can get away with murder, on the legal assertion they are dealing with “sophisticated customers.”  

  • Tom Cooper

    Larry, but when derivatives they sold short were called, the government bailed out the AIG. Even Richard Fuld, CEO of Lehman Brothers walked away unscathed. I dare say that in the changed environment from those days, the common man should not suffer a loss of basic public transportation services. JP Morgan bought back all of those CMO’s from pension managers to avert the long term crisis in funding. Now that the banking section has recovered, shouldn’t they return some liquidity to the public transport sector?

  • This is small change – sorry. The MBTA’s share of this refinancing scheme would be $26 million a year; but its annual debt interest payments are $351 million, of which all come from the state legislature’s decision to put debt for its own projects on the MBTA’s books (including $117 million a year from Big Dig mitigations; I asked Hanley specifically about that at Netroots Nation, and he ignored my question and talked about refinancing).

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  • Irisstarr

    Which are the 12 agencies?

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