Bloomberg Story on Goldman Sachs Swap Fees for Bonds which don't exist

Bloomberg reports quite an incredible story, Goldman Sachs Still Paid for Swaps on Redeemed Bonds .

Goldman Sachs is still charging fees on interest rate swaps long after the actual bonds are sold. Nice business model! Fees on underlying assets which no longer exist.

New Jersey taxpayers are sending almost $1 million a month to a partnership run by Goldman Sachs Group Inc. for protection against rising interest costs on bonds that the state redeemed more than a year ago.

The most-densely populated U.S. state is making the payments under an agreement made during the administration of former Governor James E. McGreevey in 2003, when New Jersey’s Transportation Trust Fund Authority sold $345 million in auction-rate bonds whose yields fluctuated with short-term interest costs. The agency finances road and rail projects.

“This vividly shows the risk of entering into interest- rate swap agreements,” said Christopher Taylor, former executive director of the Municipal Securities Rulemaking Board in Alexandria, Virginia. “The world’s got to see what stupidity even the sophisticated investors like the transportation fund can get into.

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That last sentence says it all.

There are a lot of players in the OTC market that don't know what they are getting into.

Proctor & Gamble vs. Bankers' Trust is another example. I think P&G actually admitted in court filing that it had no idea what Bankers' Trust sold them but they were playing in the OTC market.

Financial conglomerates don't want any transparency in this market because 1) it would kill their spreads and 2) they know there are a lot of suckers out there.

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yes but this is the first report I've read

where GS is actually collecting fees long after the underlying asset is gone. I expect to see some lawsuits over this one.

A little different than realizing someone had dumped in a pension fund into a host of CDOs per say and lost 90%, etc.

Very good reporting by Bloomberg.

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But here is the thing. Why didn't the fund

close out its position in the interest rate swap. There are a lot of questions that need to be answered. Was it too expense at the time? Did someone drop the ball and forgot about the agreement?

There is serious informational asymmetry problem in the OTC. Wow, that is a big word I just used. Goldman Sachs and other big-time derivatives dealers have the advantage over municipalities or others.

I would be curious about what the hell were the financial advisors to the fund were doing and were the financial advisors and their relationship with Goldman Sachs.

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