A January report by United NY, the Center for Working Families, and the Strong Economy for All Coalition slamming the Metropolitan Transportation Authority (MTA) for its “expensive” and “risky” swap deals is getting new attention this week.

But there’s still not much there except a big distraction from the real challenge.

The background: the MTA borrows money by issuing debt, lots of it. Most of this debt carries a long-term, fixed interest rate, like most people’s mortgages. The MTA prefers debt with a fixed interest rate to protect it from sudden interest-rate spikes.

But the MTA borrows some money at “variable” interest rates — that is, they can go up if general interest rates go up, just like circa-2006 “teaser rate” mortgages.

To protect itself (and riders and taxpayers) from this risk, the MTA makes a deal with a bank under which if interest rates rise, the bank will pay the authority; if interest rates fall, the authority pays the bank.

This system makes a sort of sense. When interest rates are falling, the MTA is already saving money on its variable-rate debt (the interest rates on that debt fall too,), meaning the MTA has “extra” money to pay the banks on its swaps. When interest rates are rising, the MTA gets the “extra” money from the banks to pay the higher rates on the variable-rate debt.

Does hedging pose risks?


One risk is that the hedge is imperfect: that is, when interest rates on variable debt rise, interest rates on the hedges don’t fall enough.

Another risk is that the MTA pays too much for its hedges, because the swap market isn’t properly regulated. Transactions don’t take place on public exchanges so that everyone can see what everyone else is paying.

But the report doesn’t present a sober analysis of these risks.

Instead, it says, more or less, that the MTA is getting hammered by the big bad banks because — boo hoo — the authority protected itself against rising interest rates, and … interest rates fell instead.

This complaint is like buying homeowners insurance and then complaining that your house didn’t burn down. You’re still getting the protection even though you don’t need it.

The groups’ remedy, too, is over the top. United NY et. al. say that the government should “demand that bank counterparties cancel swaps at no cost or renegotiate terms more in line with today’s interest rates.”

But whether these deals were good contracts or bad, they’re still contracts. The government should hardly bully their counterparties into letting them out of commitments.

Indeed, such a move would increase costs to the MTA in the long run, as banks would charge extra for political risks.

And the MTA’s bigger problems would still remain: the fact that it even had $30.1 billion in debt as of last fall, and the fact that the debt will rise by more than a third in the next half-decade. Plus, there are rising pension and health costs for workers.

Speaking of which, the Transport Workers Union should be the first group to speak out against the idea of voiding long-term contracts when they’re inconvenient.


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