A perspective on some MTA financial blunders

In The Times today, William Neuman explores an ill-timed and ill-advised bond issue by Citigroup on behalf of the MTA. It’s your typical financial meltdown story of the kind that have grown so prevalent in over the last few months.

In August 2007, Neuman reports, Citigroup analysts grew alarmed at instability in the auction-rate securities market. Yet despite these fears, Citigroup continued to push bond offerings. Neuman tells of the MTA’s perceived woes:

But that did not stop the bank from peddling the securities to investors and working with government agencies — including the Metropolitan Transportation Authority, which runs New York’s sprawling subway, bus and commuter rail system — to bring more bonds into the already stressed market. With Citigroup Global Markets as one of its underwriters, the authority issued $430 million of auction-rate bonds on Nov. 7, 2007.

Almost immediately the deal soured. Interest rates on the bonds, set in weekly auctions, began to climb, to 4 percent from about 3 percent, and finally, by February, to 8 percent. By then, the entire auction-rate market had collapsed as panicked investors worried that they could not get access to their money.

Stunned by the soaring rates, which were costing it up to $560,000 a week, the authority redeemed the securities in March. To do so, it issued a new round of bonds, outside the auction system and at more favorable interest rates. But the move came with a cost: about $5.6 million in fees to bankers, lawyers and others, including the state, according to data provided by the authority.

That sounds bad, right? The MTA, long in debt and facing a budget crisis, added its own demise by flushing money away in a bad Citigroup investment in 2007. Let’s break out the pitchforks and burn down MTA Headquarters! Power to the people!

If only it were that simple. In reality, this is a long and complex story about something through which nearly every single organization has suffered over the last few years. The MTA didn’t make money in a bad investment. But as the agency has a diversified portfolio, they were, until the markets went south in late 2008, able to make up for it, and they could offset these losses by saving $150 million in the variable-rate debt market. “This was a calamitous disruption in the credit markets,” MTA CFO Gary Dellaverson said to Neuman. “We managed our way through it.”

It’s other worth noting that $5.6 million represents less than 1/2 of one percent of the MTA’s overall debt. While every little bit helps, these Citigroup losses were but a drop in the MTA financial bucket. You decide how much this really matters in the grand scheme of transit in New York City.