Resetting loan rates hit public projects

Jill Barshay Feb 22, 2008


Scott Jagow: You’ve heard plenty about adjustable-rate mortgages resetting this year. But homeowners aren’t the only ones facing this problem. Cities, schools, even museums will also see their loan rates go way up. Jill Barshay has this report.

Jill Barshay: Local governments and nonprofits have borrowed $300 billion in an arcane corner of capital markets called auction rate bonds.

Investors don’t want these bonds right now — they’re spooked by the credit crunch. So rates are resetting by twice as much or more. Taxpayers and donors are on the hook for hundreds of millions of dollars in extra interest payments they never expected.

Joseph Fichera of Saber Partners advises local governments. He says a big problem is that cities are selling their bonds through just one investment bank, which controls the auction.

Joseph Fichera: The Treasury Department would never sell all of its bonds through just one dealer, nor should anyone who wants to really do an auction.

Fichera says Wall Street is encouraging cities to retire these auction bonds and replace them with ordinary bonds.

Fichera: Right now, most of the proposals are simply to dump it and run.

Wall Street earns fees on these refinancings, which ultimately will be paid by taxpayers too.

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

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