A Los Angeles City Council member introduced a motion calling on Bank of New York Mellon Corp. (BK:US) and Dexia SA (DEXB) to unwind two interest-rate swaps negotiated in 2006 that he said have cost the city $65 million.
Councilman Paul Koretz, a Democrat who represents Bel Air and part of Hollywood, said the city should stop doing business with BNY Mellon and Dexia if the banks refuse to let the city out of the swaps, according to the motion entered yesterday.
Municipal borrowers nationwide have paid at least $4 billion to banks to end privately negotiated interest-rate bets sold as hedges. The Federal Reserve’s policy of holding its benchmark borrowing rate near zero since 2008 has turned many of the swaps into wrong-way bets.
“When these swaps were entered into, they were probably a good idea,” said Lisa Cody, a researcher for Service Employees International Union Local 721, which encouraged Koretz to act. “We feel that the bank needs to renegotiate these unfair deals.”
Los Angeles sold $316.8 million in bonds in 2006 to finance improvements to its wastewater system, entering into swaps with BNY Mellon, the world’s largest custody bank, and Dexia, Belgium’s largest bank by assets, to cut the cost of the debt.
Koretz’s motion asserts that BNY Mellon and Dexia are profiting by a total of $4.8 million a year on the swaps deals and that they demand $24 million to terminate the deals. The banks have “unfairly” profited $65 million so far, according to the motion, and the city may lose another $69 million at current interest rates if the swaps remain in effect until their 2028 termination date.
The city refinanced the debt last year, reducing the amount by half, according to bond documents. Because of a decline in interest rates since 2006, the swaps had a negative fair value of $38.7 million as of June 2012, the documents show, with a termination fee of $24 million.
“As part of a competitive bidding process on this transaction, the city relied on an independent financial adviser to provide an impartial, objective assessment of the economic benefits of the transaction,” said Kevin Heine, a BNY spokesman in New York.
Caroline Junius, a spokeswoman for Dexia, didn’t immediately respond to an e-mail message after regular business hours requesting comment on the councilman’s motion.
Oakland, California, considered severing ties with Goldman Sachs Group Inc. last year over a $14.8 million termination fee for a 1988 swaps agreement.
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