Current Events13

Current Events13 - because of the rising interest rates so...

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Current Events: Looting Main Street The article this week was about Interest rate swaps. This is a highly unregulated market that has brought many counties in the United States and some countries in the European Union to its knees. When a government agency does an interest rate swap it pushes its debt into the future by taking on more debt. A interest rate swap happens when a loan is taken that has a variable interest rate and the institution that took the loan wants a fixed rate of interest. To take this fixed rate of interest the institution must pay a rate to the financial institution that it is taking the risk of the variable interest rates from the institution that took the loan. The city of Birmingham in Jefferson County took a loan in the early 90’s to pay for its faulty sewer system. To pay for this sewer system the local politicians took loans from Wall Street. The sewer system cost them about 3 billion dollars. When the city had to pay back the debt, they didn’t want to
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Unformatted text preview: because of the rising interest rates so they decided to refinance their debt. The banks found this very profitable so they competed to refinance the debt. Because of the refinancing and interest rate swaps the local government ended up in about 5 billion dollars in debt. Because these financial instruments, such as interest rate swaps, are unregulated, there was fraud happening. These financial instruments were unregulated because of a law that was passed in 2000 called the Commodity Futures Modernization Act. This happened in Greece, Italy, and other European countries as well as in many other cities throughout the United States. Right now there is a financial reform bill that does not do much to regulate these unregulated instruments but they have a chance that it might.
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