All this high-flying adventure--plus some bad bets on Harvard's part in the interest-rate swap market that had apparently been the brainchild of former university president Lawrence Summers--created a perfect financial storm.
For one thing, it is hard to know how much companies have in fact lengthened the maturity of their debts because the interest-rate swap market allows them to swap those fixed bond payments into cheaper floating debt, a popular strategy in the investment-grade market.
Since the income from the projects is not dependent on interest rates, the company entered into interest rate swap agreements which act as hedges.
But, at minimum you must recognize that you are arguing that the US government enter into an interest rate swap with the Global Financial system because you that your intuition about the path of interest rates is superior to that of the Global Bond Market.
As we came out of the housing crash rubble, one mini-narrative that emerged on the left was the rottenness of interest-rate swap deals.
FORBES: Banks Have Interest Rate Swapped $20 Billion From Taxpayer Pockets
One major risk (other than the obvious interest rate risk) for swap investors is that of counterparty risk.
Every day that the US government takes your tax money and uses to avoid issuing more 10 year Treasury Bonds is a day that the US government is buying an Interest Rate Swap on your behalf.
If the US government collects taxes and uses those taxes to reduce the deficit it is entering into an interest rate swap.
According to Reuters, the two-year U.S. interest rate swap spread--a gauge of financial system stress--was quoted at a record high 166.5 basis points in Asia, suggesting that concern about defaults among banking counterparties were worsening.
If more people want to pay a fixed rate in exchange for a floating rate than want to receive a fixed rate, the swap spread the fixed interest rises compared with Treasury yields.
The swap is likely to result in a significantly lower interest rate being paid by Jamaica to its lenders.
The bad bet on interest rates--a swap in which Harvard was paying a high fixed-interest rate and collecting a low short-term rate--goes back to a mandate from former Harvard President Lawrence Summers.
Interest-rate swap agreements are essentially financial bets many states and cities made in recent years in the hope of protecting themselves from higher rates.
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