Bloomberg News has an account of what it calls "a contract that hedges nothing" -- an agreement under which New Jersey taxpayers have paid $11.4 million to a Goldman Sachs-led partnership "for protection against rising interest costs on bonds that the state redeemed more than a year ago." As the Bloomberg article also recounts, Harvard University also got in trouble with these interest rate swaps; the wire service says the university "disclosed it had given $497.6 million to investment banks to exit such agreements." The Goldman managing director who sold the swaps to New Jersey Transportation Trust Fund Authority now also serves as a director of the Municipal Securities Rulemaking Board that is the self-regulatory body for that part of the financial industry.
In the post on the Goldman Gift, I argued that instead of making a big donation to charity to help its image, Goldman would be better off trying to educate the public on the idea that "the work it does -- efficiently allocating capital, providing liquidity and capital and advice for entrepreneurs trying to grow their businesses, providing returns for shareholders and challenging, lucrative jobs for employees -- is valuable in its own right." I actually believe that description holds true for much of the firm's work, but it's difficult to see, at least on the basis of the Bloomberg account, just how this particular deal fits into that framework. Maybe I am missing something. On the other hand, this swap had both a seller and a buyer, and if it didn't work out well, the New Jersey Transportation Trust Fund Authority, bears some of the responsibility, too.