State and local governments in the U.S. have paid hundreds of millions of dollars this year in cancellation fees on bad investments in derivatives, raising concerns among taxpayers and regulators over the lack of transparency in such contracts. Recent reports of such payments by the New Jersey Economic Development Authority, New York's Metropolitan Transportation Authority and a municipality in Tennessee to banks with which they had entered interest-rate swaps and options, have drawn attention to the issue--which the Government Accounting Standards Board is working to address.
But Peter Block, director of corporate and government ratings services at Standard & Poor's in Chicago, said that while greater transparency is important, especially as derivatives use becomes more prevalent, fear of public service cuts from cancellation payments is overblown, and that no dramatic events have yet happened as a result. "It's very misleading to say [governments] lost money because of the termination payment," he said. "Economically, they will be made whole if they issue bonds in the current rate environment."
