Separate the Fools from Their Money-Part II

Sometime last year I wrote a piece on the foolishness of many European municipal treasurers who allowed themselves to enter into transactions which under the guise of providing them with lower funding costs actually put them into risk positions far outside the briefs and unfortunately their understanding.

This morning as I sat down to my coffee and the Sunday NYT I was somewhat bemused to see the headline "Wall Street's Tax on Main Street". Bemused on a number of levels. Firstly as the implication was that Wall Street was levying a tax on Main Street which is patently an incorrect use of the word tax.

Wall Street can charge fees to Main Street, and does. But to suggest that Wall Street taxes Main Street in the sense used, is ludicrous.

My bemusement continued as the article shifted from incompetent municipal treasurers to equally ignorant corporate treasurers such as the Boca Raton Medical and Surgical Specialists.

These brain surgeons entered into a 5 year financing with a 25 year swap attached to it. The loan had fees of 3.8% or US$ 800,000 on a 21 million dollar loan.

One can argue the fee structure. What one cannot defend is the bank's sale of a 25 year swap structure nor the corporate treasurer's willingness to enter into such a transaction. Whatever the supposed cost savings sold to the treasurer there is no way that the risk position associated with a 25 year swap could ever be logically explained to someone taking on a 5 year loan.

But annoyingly the article didn't focus on the inappropriate sale of swaps to unsuspecting and obviously incompetent borrowers. Instead it focuses on the level of fees associated with swap transactions and closes with the tired call for transparency in swaps pricing.

Fools have been separated from their money forever. To talk about fees and the "shadowy" nature of swaps pricing while ignoring the fact that the problem lies in the intentional use derivative terminology to bamboozle (obviously) easily fooled borrowers to assume risks they should never even entertain let alone enter into.