WITF: A bipartisan group of state senators is trying to rid Pennsylvania of the use of complex financial agreements known as interest rate swaps.
Interest rate swaps have been maligned in recent years as the unnecessary bringer of woe, as governments saw cash cows turn to dollar drags when they were blindsided by the 2007 credit crisis, and then the recession of 2008. The instruments were illegal for local government entities across the commonwealth until a 2003 law signed by former Democratic Gov. Ed Rendell.
“There have been examples of where it has succeeded, but you only need to get it wrong once before taxpayers are on the hook for a bad decision or bad risk,” said Fred Sembach, chief of staff for Sen. Mike Folmer (R-Lebanon). Folmer is sponsoring a measure to eliminate the use of swaps among government entities and municipal authorities… (more)
EDITOR: It is the interest rate SWAP that the Lancaster County Convention Center Authority fool heartedly entered into in order to maximize its ability to borrow that has contributed to its financial difficulties. Although interest rates fell dramatically over the intervening years, it was unable to benefit from much of the decline. At this point in time, it would cost over $14 million to cancel the SWAP Agreement according to the LCCCA.
This shouldn’t really be a problem if borrowers are allowed to declare bankruptcy. Lenders with some skin in the game aren’t as reckless when their borrowers are not “too big to fail.”
All the more reason why taxpayers should be happy to see some communities declare bankruptcy. It might limit the damage the politicians can do.
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