Governor Phil Bredesen Criticizes Morgan Keegan On Derivative Deals In Tennessee
In addition to ballooning budget deficits and rising unemployment, many Tennessee cities and counties also are facing massive interest payments on bonds, largely because they were ill advised by investment bank Morgan Keegan to use a complex financing arrangement involving derivatives. Already strapped for cash, places such as Lewisburg and Mount Juliet now must either come up with the money to pay the bonds’ higher interest payments, which in some cases has quadrupled, or terminate the interest rate swaps, yet another costly measure.
Tennessee’s derivative debacle has become even more controversial following a recent story in the New York Times that reported on Morgan Keegan’s lengthy and questionable role in selling interest-rate swaps to local government officials in Tennessee.
Since 2001, Memphis based Morgan Keegan has sold $2 billion worth of derivative instruments to 38 cities and counties in Tennessee, according to state records. In addition to acting as an advisor and underwriter of derivative instruments, Morgan Keegan also resided over state sponsored seminars on interest rate swaps in which bankers from Morgan Keegan taught representatives from various Tennessee cities and counties about derivative financing.
That apparent conflict of interest now has the attention of Tennessee Governor Phil Bredesen. On April 9, in a story in the New York Times, Bredesen publicly questioned the appropriateness of Morgan Keegan’s multiple roles as teacher, adviser and underwriter. The governor also had harsh words for state officials, whom he said failed to do enough to protect cities and counties that ultimately used municipal bond derivatives.
Tennessee comptroller Justin P. Wilson has since put a freeze on all applications for interest rate swaps. On May 4, the Tennessee State Board will begin reviewing the guidelines that oversee derivatives, as well as the appropriateness of allowing investment banks like Morgan Keegan to teach state mandated seminars to area officials.
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