Home MTA Economics How the MTA’s global investments backfired

How the MTA’s global investments backfired

by Benjamin Kabak

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.

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Chris November 3, 2008 - 12:53 pm

They didn’t get greedy. They tried to do more with less, by taking a riskier loan. It is the same thing that many people did, and it is not inherently greedy. It is only a bad decision if you are not able to handle the risk of the payments going up (and we are finding out that many americans are not able to handle that).

Perhaps the MTA should have been more conservative with the public’s funds, there is a reasonable discussion there. However, if there hadn’t been any trouble with the banks, perhaps we would be having a discussion about how the MTA was lazy instead of seeking cheaper financing.

Any MTA CFO has to be able to look into the future for the life of the loan. If they get the wrong answer they get criticized for wasting public funds.


Julia November 3, 2008 - 1:21 pm

I think you’re saying pretty much the same thing as Ben. Just substitute “irresponsible” for “greedy”.

I don’t think the MTA should be experimenting with risky newfangled financial products, ever. That’s true whether the market goes up or down — the issue is not whether, with 20/20 hindsight, you picked a winner, but whether the strategy at the outset was a wise one.

The thing is, as we now know, everyone was wildly underestimating risk over the last decade. All the major banks and financial institutions. Alan Greenspan, for crying out loud. I’d bet that even if the same people stay in charge at the MTA, they’ll be much smarter in the future.

Marc Shepherd November 3, 2008 - 3:28 pm

It’s important to note that this mistake was widely duplicated, all over the country. While I am not defending it, it was not an isolated error of judgment at MTA HQ. Lots of very smart people were taken in.

Angus Grieve-Smith November 3, 2008 - 8:51 pm

Back in 2005 I went to a talk given by Peter Kalikow, who was head of the MTA at the time. He encouraged us to vote for the MTA bond issue that was on the ballot then. Afterwards, I asked whether it was wise for the MTA to be taking on so much debt.

Kalikow asked, “Do you own a home? Do you have a mortgage on that home?” If I’d known then what I know now I’d have said, “Yes, but it’s a fixed-rate mortgage!” Aren’t you supposed to lock in rates at the bottom of the market? Isn’t that what we hired him for?

Second Ave. Sagas | A New York City Subway Blog » Blog Archive » » MTA playing the Hudson Yards waiting game November 4, 2008 - 1:38 am

[…] this confidence is all well and good, but this news — coupled with yesterday’s examination into Dellaverson’s risky investment strategy — makes for a rough week for the MTA’s […]

Second Ave. Sagas | A New York City Subway Blog » Blog Archive » » Clearing up an economic mea culpa November 6, 2008 - 1:22 am

[…] Monday morning, when I ran a piece on the MTA’s global investments, I leveled some fairly serious charges at MTA CFO Gary Dellaverson and his investment strategy. […]


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