Swap agreements not working in Pa., auditor general says

John O'Brien Nov. 19, 2009, 2:00pm


HARRISBURG, Pa. (Legal Newsline) - Pennsylvania Auditor General Jack Wagner wants local governments and school districts to stop entering into swap agreements with investment firms.

Wednesday, Wagner called on the state's General Assembly to outlaw interest rate swaps, picking up on an issue that New York Attorney General Andrew Cuomo is also probing. Wagner did so after issuing a report that says a school district lost more than $10 million in the agreements.

Wagner is running for governor next year, as is state Attorney General Tom Corbett.

"Quite simply, the use of swaps amounts to gambling with public money," Wagner said.

"The fundamental guiding principle in handling public funds is that they should never be exposed to the risk of financial loss. Swaps have no place in public financing and should be banned immediately."

Wagner's office says Cuomo is also investigating a possible ban, while they have already been banned in Tennessee.

The swaps used to be an attractive investment instrument when interest rates on variable-rate bonds and notes were low in comparison to fixed-rate bonds and notes, Wagner said. They are known formally as qualified interest rate management agreements, and involved contracts between a bond issuer and an investment bank to exchange cash flows during an agreed-upon term.

Since 2003, 21.4 percent of school districts and 86 local governments entered into swap agreements with at least 13 investment firms, including Citibank, Goldman Sachs, J.P. Morgan and Morgan Stanley.

Records show that 626 swap filings were made in the state. Until Sept. 2008, they were favorable for Bethlehem Area School District when the financial industry began to struggle. It paid $12.3 million to J.P. Morgan in May.

In addition to other agencies, Wagner sent Corbett his findings.

From Legal Newsline: Reach John O'Brien by e-mail at jobrienwv@gmail.com.

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New York Attorney General
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