The same large banks whose unregulated actions
were primary contributors to the economic downturn have also been
manipulating state and local governments to profit from budget deficits
for years. Essentially, banks are alluring states with
the promise of a means to cut borrowing costs and increase returns
through the use of an interest rate swap. The mechanism is a
derivative that allows cash-strapped municipalities and states to
exchange interest payments on a variable bond deal for an allocation of
funds from a bank. So, the bank would establish a fixed rate on the
bond and swap
for the variable "interest rate of the bond that was set by larger
macroeconomic forces, such as the Federal Reserve." Unfortunately, the
results have been disastrous.
