A Wall Street Gimmick That Soaks Taxpayers

The subprime mortgage crisis isn't the only Wall Street-created calamity upending the finances of U.S. states and cities. For more than a decade, banks and insurance companies convinced governments and nonprofits that using swaps contracts would lower interest rates on bonds sold for public projects such as roads, bridges, and schools.

It didn't work out that way. Since the credit crisis began in 2008, failed swaps deals have cost more than $4 billion as hundreds of borrowers, from the Bay Area Toll Authority in California to Harvard University, quietly pay Wall Street firms to end interest-rate swap agreements. The termination payments to Wall Street firms come at the worst possible time. States will face budget gaps of $72 billion next fiscal year, according to the National Conference of State Legislatures.