“The state is not where we’ll have trouble. It will be the
local and conduit issuers,” said Feinberg, whose board does not
directly oversee derivative contracts. “As state treasurers, you
should help police the use of derivatives among smaller issuers in
your states. They look to you for help and guidance. I’d ask that
you preach the gospel: encourage them to have investment policies,
and to fully understand what they’re doing with derivatives.”
Municipal bond issuers have entered derivate transactions
valued at between $200 billion and $400 billion, Moody’s Investors
Service estimates. Credit analysts say that the use of derivatives
in the municipal market has grown over the past several years.
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Feinberg said the chief concern of the rulemaking board, the
self-regulatory agency that sets rules for the municipal bond
market, is that small towns or other small issuers will get into
interest rate swaps without fully understanding or analyzing the
transaction because they want to seize an upfront payment to help
close a budget deficit.
Feinberg said as many as 70 percent of U.S. municipalities
are now facing budget deficits, and that investment banks and
others are marketing derivatives to them as a tool to help offset
budget problems.
He said the risks include the downgrade of a swap
counterparty’s credit, which could tarnish the issuer’s credit,
and that a municipality would have to pay a large fee to terminate
a swap.
Feinberg said in an interview after his speech that he is
urging groups such as the Governmental Accounting Standards Board
and the Government Finance Officers Association to create a list
of guidelines and best practices in terms of evaluating and
disclosing derivatives.
“Derivates are high on everybody’s priority list right
now,” Feinberg said in the interview. “We don’t want to see
these products, which are good and useful in the right context,
hurt the integrity of the market.”
Bloomberg News
