Report from the BMG apple barrel correspondent: Senate Democrats took the pirate pledge of secrecy today as the crew of the mighty ‘Swaptions’ converged on Beacon Hill brandishing a map they said shows $400 million in buried treasure. State House News:
Over the impassioned objections of the five-member Republican caucus and the Democratic head of the committee that oversees long-term debt, the Senate sent Gov. Deval Patrick legislation putting the state’s credit backing behind risky interest-rate swap agreements at the Mass. Turnpike Authority. …
“I don’t know any taxpayer in Massachusetts who wants to be on the hook for the obligations of the turnpike,” said Sen. Mark Montigny, one of six Democrats who joined with five Republicans to vote against the bill, which passed 27-11.
The Senate rejected Montigny’s call to delay the bill further and to revise it to include additional disclosure requirements. The bill, which passed several weeks ago in the Senate, originally included the requirements Montigny sought, but House members stripped many of the Senate’s disclosure provisions.
Call it a congratulatory bonus for the Pike’s Easter-weekend toll taking team.
Bottom line: if the Governor signs this measure: (1) you personally will be liable for debts incurred by the “independent” Turnpike Authority, including a possible $370-400 million ‘swaptions’ termination payment to convicted IRS tax cheat and former Nazi slave labor beneficiary Swss bank UBS, (2) debt service costs to the Commonwealth will increase, now or later (nothing is free), and (3) the details of the fiasco will be secret.
I don’t know about you, but I’m getting a bit tired of bailouts for incompetents, especially when accompanied by cozy secrecy agreements. If the Pike owes money on a dumb deal they made, let them pay. If they can’t pay, put them in bankruptcy. UBS, which is apparently a ward of the federal government, can afford a hit better than us. As an alternative, the Authority could just stop paying: Alabama’s approach. At a minimum, end this farcical “independence” where the Authority is free to negotiate bad deals and behave like infants, and we are forced to pay. Above all, let’s see who made the deal with the ‘swaptions’ pirates and exactly how it was done, so we can make sure it doesn’t happen again.
David, the old softie, isn’t as eager to put the Pike into bankruptcy as I am, as you can read below. Both of us find the secrecy provisions disgraceful. Have your say in the comments. Arr.
Correction: I wrote Tuesday that the downgrade Monday by Moodys of the Authority’s insurer Ambac, in combination with a previous downgrade of Ambac by S&P, meant that the Turnpike Authority was in default on its UBS swaption. It appears, however, that just one more teensy tiny downgrade by S&P still is required before a default can be declared. Like an Easter drive on the Pike, give it time.
ryepower12 says
would putting the Commonwealth’s credit rating behind the Turnpike on this swaption really be able to prevent the $400 million — and how? If it’s the sort of thing where we’re just hoping it would, kind of sort of think it could (hey, it sounds reasonable!!)… then you’re right, Bob, and we should just let the Pike go bankrupt.
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p>If its 100% certain our Commonwealth’s “full faith and credit” would stop the $400 payment, then David’s right.
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p>And there’s no excuse for any legislation that passes that 1) doesn’t spell out how, exactly, we got here (name names!) and 2) how we can make sure it never happens again.
pbrane says
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p>I didn’t see anything in the swaptions with UBS that referenced an acceleration event based on Ambac’s credit rating so what triggers the acceleration and what prevents it is hard to say. Does anyone know in what document the acceleration provision exists? Is there a copy of that around?
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p>From what I’ve read this move (guaranteeing the future payments owed on the swaps) will prevent the acceleration event. But preventing acceleration does not relieve the MTA of the liability, it simply defers the payments to future dates (over the next 30 or so years) under the basic terms of the swaps. $400mm is the present value of the remaining payments owed UBS under the swaps based on current interest rates, which are extremely unfavorable to the MTA at the moment. I don’t think the state will have to write a check today for $400mm if it guarantees the future swap payments, but obviously it will have to write checks over the next 30 years to help the MTA meet those payments if the MTA does not have enough future revenue to cover them.
david says
I haven’t seen the documents, but I’ve read a lot of news reports about them. As I understand it, UBS has the right to terminate if both the Pike’s and its insurer’s (Ambac’s) bond ratings fall to a certain level. The Pike’s rating has already done so. Ambac has been sufficiently downgraded by one agency (Moody’s), which UBS claims gives it the right to terminate. The Pike has argued that two downgrades (both Moody’s and S&P) are required, and S&P hasn’t done so yet. That’s a dispute between the parties.
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p>In any event, the state’s stepping in to guarantee the debt does not remove UBS’s right to terminate; the hope is that, if the state guarantees the debt, UBS will agree not to terminate.
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p>Of course, if UBS decides not to terminate, the Pike is still stuck with a lousy agreement that is costing it millions of dollars, but over a long period of time, as you point out.
pbrane says
… we finish the negotiations before we issue the guarantee.
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p>The swaps are in a really lousy place right now but 30 years is a long time and they could easily flip into a much better place for the MTA (and worse place for UBS) over that time frame. In other words, it makes all sorts of sense for UBS to accelerate if they have the right. I guess the only leverage the state has is to tell UBS they will let the MTA default and/or fall into bankruptcy.
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gary says
There is a tipping point, beyond which even the Massachusetts AAA gilded bondholder are going to question how Mass can live up to its debt promises.
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p>Guarantee a few hundred million authority bonds here and there; a transportation issue; a biotech issue, all on top of the highest per capita debt of all the states. Add to that, a severely underfunded pension; an inability to raise revenues or cut costs, a protracted recession, continued rise in medical insurance costs.
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p>Not even a perfect storm I’m describing. Just a storm. A State GO bond downgrade would instantly cost the State hundreds of millions in higher interest annually.
somervilletom says
Ralph: I’ve just been sued for a MILLION DOLLARS, what should I do?
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p>Lawyer: Have you got a million dollars in your bank account?
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p>Ralph: NO, of course not!
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p>Lawyer: Don’t pay.
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p>I’m with Bob (and Ralph’s lawyer) on this one. Pull the plug on the Turnpike Authority. Force them into bankruptcy and then dissolve them.
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p>
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p>Bingo, give that man a cigar!
southshorepragmatist says
…but we all need to hold our state senators accountable.
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p>Rather than just yapping about it on here, we should all be calling or emailing our state senator (and state rep!) asking why they said no to an attempt to bring accountability and transparency to this turnpike mess.
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p>We can’t let the only critical voices be those of the right-wing nutters.
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p>Remember: even though your state legislator may be wonderful and always votes progressive, and shows up at every Boy Scout meeting, and always remembers to send you a card on your birthday, it is still OK and appropriate to question him or her when he or she takes a questionable vote.
dhammer says
Honestly, every time this comes up, UBS’s connection to the Nazis is mentioned, it’s not relevant and it’s not helpful.
bob-neer says
There is the relevance. As to being helpful, it seems to me UBS can take care of itself quite well.
markb says
Childish, irrelevant diversion from the issue at hand.
bob-neer says
If you want to talk about swaptions, fire away.
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p>If you want to debate the ethics of UBS’s exploitation of Nazi slave labor, please start another thread.
mr-lynne says
… I hate these guys.”
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p>-Indiana Jones
Indiana Jones and the Last Crusade
sabutai says
dcsohl says
“I don’t like Nazis” doesn’t cut it, Bob. The situation would not be changed one whit if it had been Credit Suisse instead of UBS. The Nazi connection is a valid reason to dislike UBS, but it has no relevance in the factual matter at hand (i.e. the Pike’s situation).
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p>Perhaps you’d be fine with it if every time Thomas Jefferson was brought up, regardless of context, he was referred to as a slave-owner? Relevance?? Well, nobody likes a slave-owner. Relevant!
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p>And you know what “not helpful” means in this context. Your snide dismissal of it is is disrespectful of dhammer and his/her point.
nopolitician says
What is the downside of Chapter 9 Bankruptcy (also known as municipal bankruptcy — though it can be used by a public agency? I don’t think there is any danger of a private entity purchasing the road — I don’t think that is allowed. The bondholders would get the shaft, but they are investors, there is always risk in that. Am I missing a big negative here?
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p>Why should the taxpayers foot the bill to what amounts to a massive leveraged gambling debt — more or less unrelated to services being provided? Shame on UBS for entering into such an agreement — they obviously assumed that the state would bail the MTA out — screw that!
gary says
If Mass were to allow MBTA to go Chapter 9, what would that do to the ratings of the other agency debt? Maybe nothing; maybe a downgrade, but certainly nothing good would come of it.
pbrane says
What did they do wrong? They entered into a contract in good faith. I don’t think they had a gun to anyone’s head. That they are owed money under the contract isn’t their fault – it could easily have gone the other way. While I am not at all enamored with them or their history, I don’t see what they did that was evil in this deal.
johnd says
Are you afraid of Bob or do you just have a thing for me…
david says
is that it generally refers to subjects to which the Nazis are not relevant. But since UBS has a well-documented record of working with the Nazis and benefiting directly from some of their most atrocious policies, invoking the law is an abuse in this case. From the wikipedia entry:
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markb says
The people who did business with the Nazis are dead. Unless you believe that the Nazi Stain has magical powers from beyond the grave, you are just embarrassing yourself. There is an important issue at hand here. Please recognize it and stay on topic.
bob-neer says
Or maybe you think that is also childish, irrelevant and a distraction. After all, the people in the private wealth management division of UBS who organized the fraud, and indeed may still be participating in it for all I know, were not the same people who sold the Pike its swaptions.
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p>How far does the UBS Stain spread, one might ask.
hrs-kevin says
If we wanted to stop these tax havens, we only need to threaten to cut nations that support them out of the US banking system.
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bob-neer says
Not everyone who uses banks is a criminal 😉
david says
Further, UBS seems not to have learned much from its past mistakes.
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p>Your opinion is duly noted.
ruppert says
How did Senators who represent Turnpike corridor towns not support Montigney on this?
amberpaw says
There appears to be a choreographer, who calls the dance numbers.
ruppert says
cos says
I don’t really understand what you’d prefer the state to do. What happens if the Pike has to pay and can’t afford it? You’re talking all about the badness of this guarantee, but it’s not being done in a vacuum, it’s being weighed against something else that’s also bad. Could you describe that other alternative, in your view, and explain why you think it’s so obviously better than this?
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p>I’m leaving aside the lack of transparency for a moment. I just want to understand what your core point is, and you haven’t made it here.
david says
From his post:
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p>
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p>I have my reasons for being wary of the bankruptcy route, but it’s certainly an option. And it answers your question. (“What happens if the Pike has to pay and can’t afford it?”)
cos says
No, that’s exactly the point: What happens then? Why is it better? He’s said nothing about it.
david says
There are other issues, but that’s the basic idea.
cos says
If it were that simple, I can’t see why the state would bother trying to avoid it. “other issues” encompasses all the important parts that Bob is ignoring, but I don’t think his argument makes any sense without exploring those “other issues” and showing why that alternative is the better one.
gary says
If the authority goes down in bankruptcy, how anxious will investors be about investing in the other numerous state authorities. A significant state authority bankruptcy likely means the State is willing to let it happen again, and elsewhere. Bankruptcy more likely ===> higher cost to borrow.
somervilletom says
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p>Agreed. Tell me again why this is a problem.
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p>Higher cost to borrow ===> more discipline in state finances.
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p>more discipline in state finances ===> better delivery of needed state services
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p>Isn’t it also true that:
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p>better delivery of needed state services AND more discipline in state finances ===> lower cost to borrow?
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p>When an individuals credit rating goes down, some individuals change the behavior that causes it. After about seven years, those individuals who do find that their credit rating goes back up.
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p>In my opinion, the agencies — and the state — are insolvent, should go bankrupt, and the state’s cost of borrowing should therefore increase.
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p>I think that’s an indication of a free-market economy working exactly as it should to solve a very real problem.
ruppert says
You trust a rogue Authority that cant even manage toll plazas, and now expose faith and credit of all taxpayers of the Commonwealth behind those fools decisions?
tired-of-paying says
This is just our friends in the state house trying to cover up the mistake they made years ago by dumping the big dig cost on to the Pike and the MBTA. Do they both have issues as independent authorities YOU BET! A lot of light needs to be shined on this transaction.