Wednesday, November 25, 2009

Small Governments With Big Debts

The new Business Week has a depressing article ("The New Threat from Wall Street") about the many deals between local governments (including transportation and utility authorities) and Wall Street banks that have soured.

The most prominent type of "deal-gone-wrong" is a sale-leaseback of hard assets (a utility plant, for instance, or Washington's subway cars) which is done to generate (1) tax credits for the bank and (2) immediate cash for the local government. The governments are defaulting on their leaseback obligations (and, to make matters worse, the IRS frowns on the transactions) and in many cases the banks are pursuing default fees and not negotiating early terminations.

Reading about this phenomena is, in some ways, even more depressing than reading about homeowners getting into mortgages they couldn't afford. It sounds as though local government leaders became as blind to the "fine print" as everyone else during the boom years and that Wall Street banks -- which marketed the deals as "you can't lose" propositions -- are not inclined to show any mercy now that circumstances have changed.

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