Cautionary Tales

The New York Times details a disturbing story from Tennessee, where many smaller city and county governments are facing enormous increases in debt service payments resulting from the economic downturn. It seems they bought into bond derivatives which were packaged, sold, and serviced by the same investment bank that conducted the state-sanctioned training which promoted the products as an interest saver. This worked well, until it didn't. Like an adjustable rate mortgage, rates and payments have skyrocketed.

“When these sophisticated things were created, most people didn’t think they’d ever be used by the smallest issuers, who had the least amount of resources and knowledge and experience to understand the risks,” said Thomas G. Doe, the chief executive of Municipal Market Advisors, a bond strategy company in Concord, Mass.

Some officials finally caught on.

In Mount Juliet, a suburb east of Nashville, city leaders were surprised to discover that the payments on its bonds had increased by 500 percent to $478,000. Morgan Keegan offered to refinance the bonds, but the city hired a new financial adviser and another investment bank.

“We decided we needed advice from someone who was not trying to sell us something,” Mayor Linda Elam said. [emphasis added]

That seems like a good approach.

Maplewood should consider it with respect to conservation easements, which are which are promoted, packaged, sold, and serviced by the Minnesota Land Trust.