New York’s Metropolitan Transportation Authority put off hiring a New Jersey financial adviser on derivatives after a finance committee member called Swap Financial Group LLC’s fees of up to $600 an hour “usurious.”
MTA managers recommended hiring Swap Financial to advise the nation’s largest transit agency on its $4.3 billion interest-rate swap portfolio. Swap Financial would be paid a monthly retainer of $5,000, and from $200 to $600 an hour for services related to new transactions.
Doreen Frasca, president of Frasca & Associates LLC, a financial advisory firm, said the fees were “usurious” and questioned the need for a swap adviser, saying the market was “dead as a doornail.”
“It would be like hiring someone to give conversational French lessons to my dog,” Frasca said today.
States and local governments have paid billions of dollars in fees to cancel swaps when the derivatives, intended to protect them from rising borrowing costs, backfired. The value of interest-rate swaps plummeted after central banks lowered lending rates to combat the worst credit crisis since the Great Depression.
Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates. Interest-rate swaps, one of the most common types of derivatives, are agreements to exchange periodic interest payments with a counterparty such as a bank or insurance company. Frequently, they involve trading fixed- for floating-rate payments.
Peter Shapiro, managing director of Swap Financial, declined to comment, citing MTA requirements not to speak to the media without the agency’s consent.
Robert Foran, the MTA’s chief financial officer, said he’d be “quite happy” to renegotiate Swap Financial’s fees after the agency, which faces a $378 million budget gap, tabled the proposed contract because of its cost.
While the MTA probably won’t enter into new derivative contracts because its borrowing costs on fixed-rate debt are lower than 4 percent, the agency will need an adviser if it unwinds any of its existing swaps, Foran said.
The MTA also needs an independent firm to monitor and value its portfolio, he said.
Goldman Sachs Replacement
South Orange, New Jersey-based Swap Financial is one of two firms that would replace Goldman Sachs Group Inc. under a proposed three-year contract. The MTA finance committee today approved giving Wayne, New Jersey-based Lamont Financial Services Corp. a three-year contract to advise the agency on debt sales.
The MTA has said its decision to drop New York-based Goldman Sachs as its financial adviser wasn’t related to a U.S. Securities and Exchange Commission lawsuit last month that accused the bank of misleading investors in a mortgage-linked security.
Also today, the MTA’s finance committee approved a $600 million bond issue for capital projects. Barclays PLC will lead a group of banks in managing the sale of fixed-rate bonds.