At the time, it seemed like a way to cut down on crushing debt costs. Yet the millions that the MBTA is paying to banks because of ill-considered interest rate swaps shows why the agency never should have entered into these complex financial deals — and why it should seek better terms now.
The T entered into interest-rate swaps in the early 2000s, when interest rates seemed low and were expected to rise. In these deals, the T issued bonds to banks and agreed to pay them back at a fixed rate. In exchange, banks would pay the T at rates that varied with the market. The swaps turned into bad bets when interest rates dipped to historic lows as a result of the financial collapse. Now the T, like transit agencies across the country, is paying down debt at rates far higher than what’s available on the market, costing the T almost $26 million each year, according to a study from a group called the ReFund Transit Coalition. The T can only refinance if it pays a huge exit fee — a step that other public transit agencies have taken.
As lawmakers scrape around for money to close current deficits and prevent future ones at the MBTA, the transit agency and lawmakers should try to find ways out of the swaps. While the banks will likely argue that these are contracts that can’t be broken, the T should still try to renegotiate. Public agencies in California, including a San Francisco museum and the city of Richmond, have successfully renegotiated swaps by stressing their fiscal struggles, while Oakland is currently in swap refinancing talks with Goldman Sachs.
The T could also note that banks profiting from swaps — Deutsche Bank, JPMorgan Chase, Morgan Stanley, and UBS — all benefited from the federal bailout as the nation plunged into recession. A troubled but essential transit agency deserves the same consideration in its time of need.