I wrote this morning about the New York Times’s vendetta against financial instruments like credit default swaps. The paper’s ill-informed crusade seems to extend to just about any complex financial instrument. A reader wrote to point out this article in Friday’s Business section, titled “The Swaps That Swallowed Your Town,” by Times reporter Gretchen Morgenson. Our reader comments:
Unbelievable!…How do they get away with this?
This article is about the use of interest rate derivatives…”swaps”….by municipalities. On some of these deals, the market moved against the municipality to some extent. Can you imagine that? They took a risk…..in order to try to beat the market and get lower financing costs!….And Wall Street let them!…indeed, encouraged and actually “pitched” or sold them on these transactions! Imagine that!…And there is no free lunch as it turns out, either!….if they change their minds…because it’s not working out… there are costs to unwinding their positions….they have to PAY those costs!….an outrage!…Of course, all the BENEFITS of the swaps they get to keep…and if the swap counterparty due to unanticipated market changes wants to unwind THEY would have to pay to get out…it’s symmetrical!…how is that fair?….I mean, shouldn’t government entities trying to beat the market get one way bets?…heads they win, tails the counterparty loses?
Morgenson helpfully provides a link to the New York State Budget report on their interest rate swap portfolio, having claimed that the poor schmucks in the State of New York treasury operation had to “pay out ” $103 million to exit certain swaps. But when you go to the report itself it tells a different story entirely! The purported $103 million is actually a staged nominal “defeasance” amount — in effect a rolling deposit — that has the economic effect of retiring the swaps. But net, net, net of all that…..the State of New York over a 7 year period is over $40 million ahead on its swaps portfolio compared to conventional financing!…Sure….2 years ago they were cumulatively $140 million ahead and the recent unpleasantness has cost them a bundle….in foregone gains or “profits” at Wall Street’s expense…but they are STILL, after all the crisis effects, well ahead of where they otherwise would have been.
This is the author’s own link, cited as a prime example of the perfidious interest rate swap market!… And it shows the OPPOSITE of what is claimed in the article!!!
The mendacity, disingenuousness and, worse, outright laughable stupidity of this exposition is beyond belief.
One wonders what former economist Paul Krugman, also a Times employee, thinks of his paper’s Luddism on the topic of financial instruments. Maybe he doesn’t understand them either, or maybe he’s so far gone in partisanship that he just doesn’t care.