Bloomberg News

New Jersey Treasurer Would ‘Stop Short’ of Full Ban on Swaps

November 09, 2011

(Adds swaps background in fifth paragraph. For more news from the Bloomberg State and Municipal Finance Conference, see {EXT2 <GO>}.)

Nov. 2 (Bloomberg) -- New Jersey Treasurer Andrew Sidamon- Eristoff said he would “stop short” of recommending a full ban on state and local governments using interest-rate swaps.

Municipal borrowers need to “exercise judgment,” Sidamon- Eristoff said today at the State and Municipal Finance Conference in New York sponsored by Bloomberg Link. “Too much of anything can be a bad thing.”

Regulators are working on rules for the derivatives industry under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The law contains provisions to protect municipalities that lost billions when the 2008 credit-market collapse caused many swaps-laden bond deals to unravel. Delaware Treasurer Chipman Flowers said the rules shield small borrowers.

“Some of these municipalities don’t have the expertise to be issuing certain types” of derivatives, Flowers said during a 30-minute panel discussion.

As much as $300 billion a year of interest-rate swaps were sold during the market’s peak, the Municipal Securities Rulemaking Board estimated based on figures from investment banks. Many sold to U.S. municipalities before the financial crisis were pitched as money-savers and were paired with other financing options such as floating-rate bonds, leaving borrowers with extra costs as banks stopped propping them up.

Rule Changes

Rules proposed by the Commodity Futures Trading Commission would require banks that pitch derivative deals to state and local governments to act in their clients’ best interests. They also force greater disclosure to prevent banks from reaping excessive or secret fees like those charged to Jefferson County, Alabama, which is considering bankruptcy because of the cost of swaps tied to sewer bonds. Rules proposed by the MSRB would also require banks to disclose more about the risks of such deals.

“These are just very complex,” said Janet Cowell, treasurer of North Carolina, which allows only its AAA rated government departments to use swaps. “There are units that just do not have the financial resources or the know-how.”

Delaware’s Flowers said taxpayers should never be “kept in the dark” on swaps.

“If there is some risk taking going on, you will get caught, and people need to know that,” he said.

New Jersey “went too far” in getting into swaps years ago, said Sidamon-Eristoff, who took office in 2010. The state unwound $1.3 billion of swaps last year and may take action in the near future to exit others, he said.

Judgment Needed

“We’re asking, frankly, public officials to exercise some judgment and go out and get the very best advice they can,” Sidamon-Eristoff said. “If I can’t understand it over the course of an elevator ride, then maybe the transaction can be too tricky, too cute, for prime time.”

The three treasurers all said they anticipate a pick-up in hiring in the coming year and are hopeful that economic conditions will improve. They said states need to be watchful of automatic cuts that may be triggered by the congressional supercommittee studying budget cuts.

--With assistance from Elise Young in Trenton and William Selway in Washington. Editors: Stacie Servetah, Pete Young, Jerry Hart, Mark Schoifet

To contact the reporters on this story: Matt Winkler in New York at mwinkler@bloomberg.net; Terrence Dopp in Trenton at tdopp@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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