When interest rates were rising to control how rapidly the economy would grow, buying protection against future increases was designed to save municipalities money. But the tables have turned.
Oakland is looking for a way out of an interest-rate swap deal it made with Goldman Sachs. While at one point the deal was benefitting the city, the record-low rates now cost the city $4 million per year. When the city switched from variable-rate bonds to fixed-rates, which many cities did, they kept their swap deal in place. Others dumped the deals.
Now, the bank is offering to let the city out if they pay $15 million in termination fees. The city is playing hardball, threatening to take its business elsewhere if they aren’t allowed out of the deal in the next 60-days.
From the Wall Street Journal:
The city of Oakland, Calif., has eliminated hundreds of jobs, cut salaries and reduced library hours, all to help ease some of the financial strain caused by tepid economic growth and a housing downturn.
Now officials from the Bay Area city want out of an interest-rate swap that costs the city $4 million a year. Goldman Sachs Group Inc., which developed the contract in 1998, has said it is willing to oblige—if the city pays the firm about $15 million to terminate it. Talks to resolve the stalemate have continued for months.
Read the full article here.