For the non-economists among us, variable-rate bonds are not very easy to understand. In sum, these stem from adjustable-rote loans in which the initial payments are low but can change over time. As we’ve recently learned, this change can be for the worse.
In Sunday’s New York Times, Charles Duhigg and Carter Dougherty explored how these adjustable-rate loans and variable-rate bonds from one bank in Ireland are impacting the MTA. The tale they weave is one of fiscal recklessness and global impact:
For years, municipal agencies like the M.T.A. had raised money by issuing plain-vanilla bonds with fixed interest rates. But then bankers began telling officials that there was a way to get cheaper financing…
The transportation authority, guided by Gary Dellaverson, a rumpled, cigarillo-smoking chief financial officer, had $3.75 billion of variable-rate debt outstanding. About $200 million of that debt was backed by Depfa. When the bank was downgraded, investors dumped those transportation bonds, because of worries they would get stuck with them if Depfa’s problems worsened. Depfa was forced to buy $150 million of them, and bonds worth billions of dollars issued by other municipalities.
Then came the twist: Depfa’s contracts said that if it bought back bonds, the municipalities had to pay a higher-than-average interest rate. The New York transportation authority’s repayment obligation could eventually balloon by about $12 million a year on the Depfa loans alone.
Basically, in a nutshell, the MTA got greedy. They could have plodded along with their regular bonds with fixed interest rates. These bonds, backed by the U.S. Government, could have served the MTA well even if they were not quite as efficiently sexy as the Depfa bonds. Now the risks are coming back to bite hard.
For their part, the MTA alleges that, for this year, it is within its debt-payment budget, but as we’ve seen time and again over the last six months, those debt payments could cripple the MTA over the next few years. While this year’s payments may be on pace, the subsequent years’ payments will be impacted by this financial crunch.
All of this economics mumbo-jumbo leads me to believe that perhaps the MTA needs some new fiscal leadership. Perhaps Dellaverson, the man who invested the MTA into this mess, needs to go. Perhaps he just needs new economic advisers who don’t play fast and loose with rather important public infrastructure funds. There is, after all, no such thing as a free lunch whether you’re a homeowner looking for a cut-rate mortgage or a cash-strapped public transit system beholden to millions of passengers each day.