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Auction-rate bond fallout continues

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Kai Ryssdal: Non-profit groups here in the states are also being affected more than they thought they would be. Cities, hospitals, and schools are some of the participants in an obscure corner of the bond market that’s collapsed in the last week or so. They’re called auction-rate bonds. And now financial costs are skyrocketing for the people involved.

Marketplace’s New York Bureau Chief Jill Barshay reports.

Jill Barshay: Local governments and non-profits have borrowed $300 billion on the auction bond market. New York’s got $4 billion of it for financing everything from hospitals to highways.

Matt Anderson is spokesperson for the state’s budget department. He says the collapse of this arcane market is bad news for New Yorkers.

Matt Anderson: It means higher borrowing costs for the state and ultimately for the taxpayers. In some cases, we’ve seen our auction rate bonds reset to nearly double the previous interest rates and the more you spend you spend on repaying your borrowing obligations, the less you’ll have available to pay for other functions of government.

Anderson says those high interest rates are making borrowers like New York think about refinancing into more old-fashioned municipal bonds.

The University of Pittsburgh Medical Center has already made the decision. The alternative is paying 17 percent — or $605,000 more a week.

Joseph Fichera of Saber Partners advises local governments. He says Wall Street lured cities, schools and museums into the market by promising cheap rates on their long-term debts.

Joseph Fichera: This is a very opaque market and that’s one of the biggest problems. The lesson is buyer beware. You must take into account risks.

Fichera says the auction bond market needs to be fixed. Until then, local governments can stay in the market and risk getting stuck with crazy interest payments or get out and pay fat termination fees and higher long-term rates.

In New York, I’m Jill Barshay for Marketplace.

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