The Boston Globe Covers Up for Wall Street, Ignores Swaps Losses in Coverage of MBTA Turmoil

A new Boston Globe story, The T’s long, winding, infuriating road to failure, purports to be “the true story of the breakdown,” a “a decades-long tale of grand ambitions and runaway costs.”

Funny how this 2500 word article makes nary a mention of the huge losses that the Massachusetts Bay Transportation Authority made, along with many other easily duped transit authorities, on swap transactions that went massively against them in an environment of seemingly permanent low interest rates.

A March 2012 article in Alternet by Tom Ferguson provided an overview. Key sections:

The Refund Transit Coalition, a coalition of unions and public interest groups, put out a study that documented in stunning detail how Wall Street banks have for years been hustling American cities, states, and regional authorities out of billions of dollars. But save for Gretchen Morgenson’s “Fair Game” column for the New York Times, the study drew almost no attention…

Its starting point will be familiar to anyone who recalls the debate over financial “reform” of the last few years. In the bad old days of pre-2008 deregulated finance, bankers started pedaling hot new “structured finance” products that they claimed were perfect for the needs of clients who had thrived for decades using cheaper, plain vanilla bonds and loans. The new marvels – swaps and other forms of so-called “derivatives” whose values changed as other securities they referenced fluctuated in value – were often complex and frequently not priced in any actual market. Their buyers thus had difficulty understanding how they really worked or how they might be hurt by purchasing them.

In many documented cases, buyers also had only faint ideas about how profitable these products were to the houses selling them. One befuddled Pennsylvania school board, for example, diffidently quizzed J.P. Morgan Chase: “The school-board official knew they were getting $750,000 for entering into a ‘swaption’ with J.P. Morgan Chase & Co. They wanted to know what was in it for the bank. They wanted to know the price. They seem like reasonable requests. ‘I can’t quantify that to you,’ the banker told them. ‘It is not a typical underwriting and I can’t quantify that for you and there’s no way that I can be specific on that.’”

One popular product involved an “interest rate” swap built into a bond deal. In these, as the Transit study explains, some hapless municipal authority brings out a bond and commits to making fixed payments to buyers. That sounds like any other old fashioned bond offer. But here’s the twist. In the swap version, the bank offers, for a handsome charge, to pay a variable fee to the issuer of the bonds. The idea was that the money could be used to make payments owed to the bond buyers. Payments were supposed to vary with the course of interest rates. The contrivances were heralded as protecting issuers against a rise in rates and saving them money on their payments.

But there was a catch: If rates fell, then banks could make out big, while issuers faced disaster, because the latter still had to make the fixed payments on their bonds, while the banks’ payments would shrink as rates fell. In effect, issuers were gambling on interest rates and betting they somehow knew better than the banks what was going to happen. And, ah, yes, the final touch: With old style bonds, you could refinance if rates fell; with the new fangled derivatives, the banks made sure to impose huge termination fees…

The Refund Transit study concentrated on local transit systems. Some of its numbers are stunning. The study pegged annual swap losses at the Massachusetts Bay Transportation Authority (Boston area) at $25.8 million and suggested that the MBTA will “lose another $254 million on these swaps” before they lapse. The study added that the MBTA was losing money on swaps even before the crisis, with total losses running in the “hundreds of millions” of dollars.

And it is not as if the Globe can feign being unaware of the swap losses. It ran this editorial, MBTA needs better terms on interest swaps, in June 2012:

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.

You would think, given that the Globe advocated renegotiating the swaps more than two years ago, that its account would include why the swaps were not restructured or settled. Was in inaction on the MBTA’s part, or that they got so much pushback from their counterparties that they saw it as too difficult to get done on advantageous terms?

The omission of how the MBTA was fleeced in a story that focuses heavily on financial mistakes lets Wall Street off easy. And the Globe has no public editor or ombudsman to take complaints about this gaping hole in its account. So much for its commitment to journalistic ethics.

Particularly if you are in Massachusetts, please call or e-mail the Globe’s managing editor for news, Christine Chinlund and tell her the Globe is showing bias by ignoring the role of Big Finance in the MBTA’s tsuris.

Chinlund’s e-mail is: and her phone is 617 929-3134.

The other approach is to show up the Globe by getting the word out through social media. Tweet this post and link to it on FaceBook. If the press refuses to do its job, it’s time for the Web-savvy to do it for them.

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  1. diptherio

    I still don’t understand how every municipality that entered into these swaps didn’t immediately seek to void their agreements and try to clawback as much of their previous payments as possible after the LIBOR scandal hit the front page. The fact that the same banks who were caught manipulating the interest rate have the balls to demand that cities uphold their end of the bargain in the swaps contracts based on those rates, and that no one in the MSM calls them on it, is a depressing sign of the state of journalism today. Even when the dots are right next to each other, almost no one bothers to connect them.

    1. bob

      I still can’t get over how on earth a US muni can sign an agreement, based on some ‘gentlemens’ agreement’ to ‘share’ rate information in the city of london.

      US law has zero force in the city, but somehow, we allow US munis to benchmark rates on this silly survey, which has no force of law, or guarantee of accuracy.

      We’re letting the city of london determine the borrowing rate for US dollars? On loans to US municipalities? The king would have been jealous.

    1. Northeaster

      No one here calls it “Massachusetts Bay Transportation Authority” , it’s either The MBTA, or more home flavor, The “T”.

      1. Chris Sturr

        @Northeaster: What is your point? The post wasn’t directed at Bostonians in particular; people outside of Boston are unlikely to know what “MBTA” or “the T” refer to. You and Steven Greenberg are just trolling. Also: nobody here says “Northeaster.” It’s “Nor’easter.”

  2. wbgonne

    Particularly if you are in Massachusetts, please call or e-mail the Globe’s managing editor for news, Christine Chinlund and tell her the Globe is showing bias by ignoring the role of Big Finance in the MBTA’s tsuris.

    Done. Here is my email to the Globe:

    Dear Ms. Chinlund:

    I am a South End resident who lives with the inadequacies of the MBTA every day. In regard to the above article, can you please explain why the role of Wall Street’s chicanery is ignored when decrying the sad state of the T’s finances? Here is a refresher on the topic:

    I fear that the article’s hints about “opaque” MBTA pensions and the purported need for privatization of T services is a telltale for the neoliberalism that casts Wall Street as a savior, rather than the villain it is. If so, that ship has sailed. Perhaps the Boston Globe should remove its ideological blinders and report accurately and honestly.

    Thank you.

    1. wbgonne

      Ms. Chinlund’s reply:

      Thanks for your insights. I was not previously aware of interest swaps involving the T but will now look into it.

  3. Larry

    I have had all my subscriber friends write into Christine. I also wrote to her and received an email in return:

    Thanks, Larry, for your critique. The Naked Capitalism piece is interesting. I will pursue.

    Sent from my iPhone

    I will have to follow the story to see if the coverage changes at all.

      1. Larry

        I will definitely update if anything changes. I’ll certainly follow up with Christine on their coverage of the story.

  4. petal

    Was in Boston for 10+ years and relied on the T 7 days a week to get to and from work. Just posted to fb so all of the friends still in town can see it and spread it around. Thank you for this.

  5. cnchal

    The most likely reason is the newspaper’s owner is close to Wall Street banksters. The plutocrat class cover up their crimes for each other.

    It is clear that nakedcapitalism has full spectrum dominance, when it comes to the truth. The MSM is a ridiculous caricature of itself, performing anatomically impossible acts to serve their owners, and lie to readers and viewers.

    No one in the MSM should get an iota of respect. To them, the truth is a foreign concept. Brian Williams spent decades lying to viewers, pimping for war, and only when the lies became too numerous, blatant and obvious was he called on it.

  6. timbers

    Yes (to this article).

    And what about Obama calling for more wars and bombings that we all know will end up costing trillions, while people in Boston can’t get to work or the grocery store because of long term planned underfunding of MBTA in particular and public transportation in general?

    Response by team blue to Obama’s more wars: CRICKETS

    1. Sam Kanu

      That’s not a democratic or republican phenomenon – it’s the disease of America in our time. People are happy to support warring in perpetuity – they dont mind even starving to do so. Go figure…

      1. MG

        They don’t support warring (at least sending in large amounts of ground troops as their is still a lot of leftover voter fatigue from Iraq) but they aren’t affected by it either. Less than 1% of Americans are actively serving in the military, no taxes have been raised as a result, there are no mass amount of American casualties coming home, and Americans haven’t been forced to explicitly ration.

        People are always happy to go war generally as long as they effects of it don’t show up on their doorstep.

  7. Chris Sturr

    That Tom Ferguson Alternet article, and the Gretchen Morgenson Times column (both excellent), were from June 2012, not March 2012. Dollars & Sense had a cover story on swaps by Darwin BondGraham earlier than that, in our May/June 2012 issue: The Swaps Crisis: Interest rate swap deals have allowed the big banks to hold
    local governments and agencies hostage for tens of millions of dollars
    . I had a piece in the same issue that linked the swaps issue to activism around the MBTA (“Occupy the T”): Riding the Rails in Boston: Occupy takes on fare increases and service cuts to the “T”. I will tweet and blog to encourage Boston-area D&S readers to Christine Chinlund to improve the Globe’s coverage.

    And there’s more: our new Republican governor, Charlie Baker, played a role in saddling the MBTA with debt back when he was on the cabinet of an earlier Republican governor, Bill Weld. As is pretty well known in Boston, much of the T’s debt was shifted onto it to help finance the “Big Dig,” our huge boondoggle bridge and tunnel project (note the perversity of forcing debt onto the public transit system to pay for a hugely expensive highway project). This has been reported in the Globe in the midst of the current publicity about the T’s woes, albeit in an op-ed piece (T’s woes are bigger than any general manager, by Joan Vennochi) and a letter to the editor (Baker helped put T on this troubled track during Weld years). It was not lost on many people that Baker was a total hypocrite for publicly criticizing the general manager of the T, Beverly Scott, when he played such an important role in underfunding the T, and when he proposed (before our series of blizzards) massive cuts to the T’s budget.

    1. aging cynic

      You have a convenient memory. Baker called out the Board of the T, not their employee Ms. Scott. And like his former boss, Bill Weld, he was called in to slow down overspending that ignored budgetary realities. The Big Dig was the brainchild of Mike Dukakis and Fred Salvucci. Somehow, that gets lost in the progressive rhetoric emanating from Morrissey Boulevard.

      1. wbgonne

        the progressive rhetoric emanating from Morrissey Boulevard.

        You must live in a time-warp. The Boston Globe hasn’t been progressive in 20 years. The Globe is now owned by a plutocrat and even endorsed Charlie Baker.

  8. brooklinite

    I was biased to think that NE corporations had better moral and ethical values coupled with smart intelligent hard working people. The proximity of Harvard,MIT and other great educational institutions doesn’t make a difference I guess. Can’t there be one guy who understands swaps? Can’t there be one executive from MBTA who would have known the risks?
    These municipalities and their need to fill budget gaps has become a perfect scenario for the banks to prey upon. It appalled to think that bank can mitigate this gap. The whole system of thinking has to change. The banks can’t solve any thing. That’s one thing I am very clear about. Now get back out there sit down and discuss a solution for yourself guys. Do some real thinking. Solve some real problems with accountability and responsibility.
    Not all the people own cars. Public transportation is how some people get by. Please understand that.


  9. Chuck Roast

    And here is my e-mail…

    Hello Ms. Chinlund:
    I was with the FTA’s Office of Planning and Environment from 2001 to 2010. During that time many transit agencies were engaging in capital asset sale/lease-back arrangements with banks and investors. Not only were these egregious tax scams, the ultimately proved costly to our agencies because the scam was on them. All of our local transit agencies (Grantees) kept these side deals well hidden from FTA financial analysts while we rated their proposed major capital New Starts and Small Starts projects…at least until these scams blew-up on our Grantees around the time of the debt-bubble and subsequent financial meltdown when FTA prohibited these practices.
    Now comes the investment banks/transit agency swaps scam. I can testify to the fact that FTA had no idea that our agencies were engaging in interest rate swaps during this period. I, being a New and Small Starts evaluator, would have personally gone through the roof had I know that my Grantee doing such a financial scam and not reporting it in the course of my financial evaluation of their project. By 2007, I was personally buying municipal bonds knowing that interest rates were going in one direction…down.
    You did not discuss these swaps scams in your ‘…road to failure’ series.
    The usual elite circling the wagons…nobody gets named, nobody gets prosecuted and nobody goes to jail.
    Everybody goes and plays golf.
    Name withheld
    Portland, Maine

  10. Bob Kavanagh

    The reply that I received:
    Dear Bob–
    I am pursuing the topic. Thanks for writing.

  11. mpr

    I’m not seeing why the banks “duped” anyone here. This isn’t a case where the swaps had some undisclosed hidden terms which caused them to blow up like e.g auction rate securities, or swaps where a fall in interest rates necessitated big up front payments to banks (see Larry Summers and Harvard).

    The MBTA and others wanted a long term fixed interest rate loan, and based on the story, that’s what they got. Had they not fixed their rates, they could have been paying lower rates now, but this hardly qualifies as something impossible to foresee. Perhaps the implication is that the deal was sold as “rates will never be lower than they are now”, but thats hard to know for sure, and anyway even Larry Summers thought so !

    1. bob

      “This isn’t a case where the swaps had some undisclosed hidden terms which caused them to blow up like e.g auction rate securities, or swaps where a fall in interest rates necessitated big up front payments to banks”

      They are swaps and they are requiring big, ongoing payment to the banks. Whether they knew about the terms is subject to debate, and either way, they should be subject to re-negotiation, as others have done.

      Read the post about it above. Calling a swap not a swap is interesting rhetorical technique.

  12. MG

    I’m a liberal and a pro-union guy but the swaps aren’t the biggest issue dragging down the MBTA fiscally. The article doesn’t do a great job of drawing it out but it is the pension and retiree health obligations, very high maintenance costs, and a typical ‘overpromising to voters’ on why the MBTA is in such a fiscal mess.

    MBTARF which administers the MBTA pension fund doesn’t even make its reports public and filing FOIA requests to get them is like pulling teeth. MBTA employees also can “spike” their pensions with unused vacation pay and other perks, the vast majority are still operating under the old “23 and out” system that was eliminated for new employees in 2009, and others can take early normal retirement at age 55 with 25 years of service. More than half of the MBTA members are now retired too. It just isn’t supportable from an actuarial standpoint to pay someone $60k-$80k annually for 25-30 years yet that is what is happening.

    Conservatives are harp endlessly on any public spending program generally but they generally have a valid point on most state and local pensions especially from an actuarial and governance standpoint.

  13. bob

    ” It just isn’t supportable from an actuarial standpoint to pay someone $60k-$80k annually for 25-30 years yet that is what is happening. ”

    Using the word “actuarial” does not mean that you produced any actual “actuarial” data. Numbers please.

    “Conservatives are harp endlessly on any public spending program generally but they generally have a valid point on most state and local pensions especially from an actuarial and governance standpoint.”

    “I’m a liberal and a pro-union guy”

    No. No you are not.

    You’re either a wall st democrat, or a paid concern troll. You say one thing at the beginning of the comment, then ‘prove’ otherwise with the content and conclusion of the comment.

      1. cnchal

        Wasn’t that billions of dollars worth of advice?

        The county, it turned out, was more than $5 billion in debt — meaning that courthouses, jails and sheriff’s precincts had to be closed so that Wall Street banks could be paid.

        Hey Jamie, could you do us a favor and spread your advice around to all the places where miscarriage of justice occurs, but make the advice stronger so that police departments can’t even afford bullets.

        That should make the streets safer, and you would be doing the public a service by stealing all their money.

    1. wbgonne

      Thanks, Bob. Couldn’t have said it better. These phonies always blame the workers, never the swindlers.

    2. cnchal

      My reading of MG’s comment is a bit different than yours.

      It just isn’t supportable from an actuarial standpoint to pay someone $60k-$80k annually for 25-30 years yet that is what is happening.

      Considering that this sentence comes at the end of a paragraph where MG writes about the MBTARF which administers the MBTA pension fund, and the open ended time frame of 25-30 years, my interpretation is that it has become financially impossible to pay all retired MBTA employees $60 to $80 thousand per year, and have enough money left over to run the trains, particularly when half the MBTA members are in retirement.

      The idiotic swaps agreements signed with the banksters amplifies the financial pain.

      1. bob

        “my interpretation is that it has become financially impossible to pay all retired MBTA employees $60 to $80 thousand per year, and have enough money left over to run the trains,”

        You’re going to have to prove that with some numbers, lots of them. He didn’t, and your re-wording of his statement doesn’t change anything. It’s a giant, unsubstantiated claim based on the myths of “everybody knows”, “common sense” and the worst offender of all, “fiscal responsibility”.

        Where’s was all the “fiscal responsibility” when the swap agreements were signed? But, it’s assumed to be true now, because you’re Very Seriously talking about making grandma eat cat food?

        1. wbgonne

          Dead right. Public employees, one of thr few remaining groups with pensions in America, are the new Welfare Queens. These attacks on pensions and calls for privatization are just more of the War on the Middle Class. No more dignified retirement, no more pensions, no more Middle Class. The T’s finances have been looted and twisted so that the the plutocrats and their minions can claim the only solution is punishing workers and privatizing services. How convenient.

        2. cnchal

          Thanks for the kick in the ass. Doing a bit of digging has led to a few eye opening factors not referenced in the post above.

          The closest I could find to what MBTA retiree’s cash compensation is, was this comment from

          As an employee of the M.B.T.A. for over 23 years there is no way I could retire and live off of my pension . Usually it is management that are some ex. speakers brother in law that can retire after 23 years because of a special provision that allows them and them only to receive 75 % of there salary . The regular worker will average $30000.00 per year while the average supervisor or superintendent will average 60,000.00 – 80,000 per year for 23 years of service . This new proposal can and will cause a mass exodus leaving only rookies and untrained workers at the T .

          The average annual salary for an MBTA employee is $44K from this source.

          An unexpected discovery is the $25 million total loss by the MBTA pension fund when it “invested” in what turned out to be a Ponzi scheme.


          Here is a quote from the carmens union article.
          ONE BIG mystery about the MBTA Retirement Fund is whether the union representatives on its board are trying to hide information just from the general public — or from their own members as well.

          Last month the board voted against disclosing information pertaining to the fund’s $25 million investment in what now appears to be a worthless Ponzi scheme; while three members aligned with Governor Patrick favored the disclosure, all three representatives of the Boston Carmen’s Union Local 589 voted against it, and an “honorary member” broke the tie. In refusing to cough up information, the board defied state law, betrayed taxpayers, and jeopardized the interests of the MBTA workers whose retirement income the fund is responsible for providing. The board should reverse its decision. If not, the state should compel it to.

          And then there is straight out corruption.

          WHAT DOES MBTA STAND FOR? Patrick Bulger, son of William Bulger, above, retired from the T in 2007 at age 43. He now collects $55,546.42 a year.

          Where’s was all the “fiscal responsibility” when the swap agreements were signed? Missing. Through corruption or negligence, the results are the same, a financial disaster all round, and the perpetrators are long gone with their payoffs.

          Cat food tastes great if you sprinkle brown sugar on it.

    3. MG

      In 2014, the MBTA paid out $180 million in pension benefits, with a third of those payments going to people who retired under the age of 50.

      This isn’t sustainable and you can’t have a system where 20%+ of the annual operating budget goes right off the top to legacy pension costs.

        1. MG

          Scroll down to p. 12.

          The annual ~$26M on the swaps rate hurts but the MBTA still had ~$240M in overall interest payments and $444M in debt-related expenses.

          It was 10% (not 20%) but you combined that with the debt-related expenses and it is chewing up the budget.

          1. wbgonne

            Pensions are deferred compensation. It does not seem especially problematic to me to pay 10% of the budget in pensions. Further, as you know, much of the current early retirement was caused by the change in law in 2009 that reformed the T pension plan. The present retirees are grandfathered and will eventually die, and the future will see only those under the reformed pension law. Even now, the pension numbers are dwarfed by bank-related financial costs. You are just gratuitously attacking public employees and pensions.

      1. bob

        Big numbers scare you? They paid out $180 million! Oh my!

        What did they take in? How much is under management? To begin with….

        You offer no context at all, only “scary” numbers, pulled straight out of your ass, for effect. I’d say you have some sort of agenda. Bond Holder?

        How much of the budget, right off the top, goes to financing, banking and bond payment costs? How much income is lost by the state due to the tax status of those bond payments?

        Why the hell does something that has as much revenue as the MBTA need any financing at all? That is, other than to allow the bond holders to pocket a few tax free points and hold the transit system hostage any time they feel “their” interests are being threatened.

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