Educate on, regulate and curb swap deals
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As early as 2009, the Justice Department launched an investigation of the swap derivatives system Wall Street had introduced as a new approach to lending to state and local authorities. The swap involved making long-term loans, at slightly under the going rate of interest, for projects that would be paid for by bonds and other devices. Swaps were widely viewed as an attractive way for local authorities to obtain money while banks earned comfortable returns. But when interest rates plummeted, borrowers often found themselves saddled with 30-year obligations costing more than revenues could cover. Unfortunately, the banks profiting the most are those that were bailed out with government loans and guarantees. As a consequence, they are earning some $28 billion annually in swap deals, but bearing little risk. Congress and the White House must investigate, educate on, the swap system and adopt regulations that can ease the plight of local authoritie; now.
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