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p>But, here’s my tin-foil hat question: is it possible that the swaptions were put in place to de facto require that the state improve the financial standing of the Turnpike Authority at the (now) later date?

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p>1)  It avoids the need to fund a large payment at a time when the budget is in disarray.

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p>2)  I believe that today’s historically low interest rate environment causes the present value of the future payments to be extremely high.  If interest rates increase going forward future payments owed under the swaps will decrease.  Given the current level of interest rates there is a much greater chance that they will increase vs. decrease over the remaining term of the swaps so more likely than not the state will be better off making the periodic payments over the remaining term of the swaps rather than a lump sum payment today.

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p>We absolutely need to answer the basic questions of why these contracts were entered into and who was involved.

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p>Also if I’m reading the email post correctly, this would appear to be a temporary reprieve since it came about based upon an increase in the bond rating of MTA debt.  I would guess that future decreases in such ratings could put us right back in the soup.

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p>

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p>Previous discussions I think pretty well established that back in the late 1990s and early 2000s, the Pike (1) was running seriously low on cash and was looking for any possible way of raising a few quick bucks without having to hike the tolls yet again; (2) was brought an enticing deal by employees of Lehman and UBS, at least one of whom was a former House Ways & Means chair; and (3) really had no idea what they were getting themselves into.

the swaptions agreements were a terrible idea, and that they have cost (and will continue to cost) the Commonwealth a good deal of money.

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p> …but I do know that the first part of your statement doesn’t imply the second.

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p>If the state got a deal where we could but $50M on the roll of a fair die*, and got paid even money on a roll of 3, 4, 5, of 6 then it’d be a fantastic idea to place the bet.  If we rolled a 1 or 2, we’d be out $50M and be cursing our luck, but that wouldn’t make it a terrible idea.

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p>Conversely, if we had to roll a 5 or 6 to get paid even money, it’d be a terrible idea even if we got lucky and rolled that 5 or 6.

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p>Bottom line: I don’t know if the expected value of the transaction was actually positive or negative, or what that distribution looked like.  The downside is certainly far down, but what was the upside, and what were the chances?  Unless we know that, it’s hard to know if the swaption as financial tool was a bet like the first one I described or like the second one.

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p>

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p> * singular of dice

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p>I think it is fair to debate whether it is ever appropriate for the state (or any government) to get involved in these type of deals:  

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p>- Does the government have the resources to adequately assess the risks of such dealings?  

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p>- Are these trades consistent with its overall appetite for risk?

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p>- Given the fragile nature of the state budget process, is the potential upside of the trades worth the incredibly disruptive effects we almost felt from the downside?

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p>If Lehman were still around, I daresay the shell game would still be going on…