All of the New York Metropolitan Transportation Authority's swaps are underwater, the authority said yesterday.

The mark to market value of the MTA's $4.61 billion of derivative contracts - the value of the swaps were they to be terminated - was a negative $351.5 million as of last week. In the past 12 months the MTA has paid $123.8 million on its swaps while receiving $86 million, a $37.8 million net loss.

"This is really the first time that we've seen such a dislocation in the portfolio and it really speaks to the market environment that we've had this past year," said finance director Patrick McCoy. "All of our costs of debt have gone up, whether it be fixed rate, variable rate, or in the case of our swaps, our synthetic fixed rate as well."

Over the past 12 months, the MTA has paid an average 3.59% on its swaps while receiving an average 2.5%.

"Theoretically, the variable rate we receive should be similar to the variable rate we pay out, and in most environments that's been the case," McCoy said. "You get into a market like this, what we've seen is Libor and SIFMA get out of whack and you're paying more than you're receiving ... That's basis risk, and it's going to happen from time to time in swap transactions."

McCoy said that in past years the swaps have behaved as intended and that the authority expects that over the long term, the payments will equal out.

"Libor's spread to treasuries, especially on the very long end, has actually gone negative, which has been a very rare event historically," said Peter Shapiro, managing director of Swap Financial Group. "It's much better that you owe them ... In a financial crisis, you'd rather not have banks owe you money, because they might not be able to pay."

The MTA's total derivative contracts include a $512.5 million swaption effective in 2012 and a $797.2 basis swap that converts an outstanding swap based on the London Interbank Offered Rate into a swap based on the Securities Industry and Financial Markets Association swap index. The authority has $3.3 billion of its $24.7 billion of outstanding debt in synthetic-fixed rate.

The MTA has outstanding swaps with UBS AG, JPMorgan, Citigroup Financial Products, Morgan Stanley Capital Services Inc., Lehman Brothers Special Financing, BNP Paribas NA, AIG Financial Services LP, and Ambac Assurance Corp.

Though some of the counterparties have experienced downgrades, they have not had to post collateral, though further downgrades to Ambac and AIG amounting to two or three notches would trigger collateral requirements, McCoy said.

The MTA is looking for replacement counterparties on outstanding swaps and one swaption with Lehman Brothers Special Financing totaling a notional amount of $253.7 million. The firm was a subsidiary of Lehman Brothers Holdings Inc. and declared bankruptcy in October, about two weeks after the bankruptcy of the parent company.

The terms of the swaps allow the MTA to replace a bankrupt counterparty, rather than terminate the swaps. McCoy said the MTA expects to replace Lehman within the next 30 to 60 days.

Despite the higher costs on its swaps, the MTA's total debt service cost this year through September is $15.3 million below the budgeted $1.16 billion. This is due to some variable-rate debt performing better than expected, McCoy said.

MTA board member Doreen Frasca said that the finance committee needed to be better informed about what the authority was doing with its swaps.

"Before we enter into interest rate swaps, especially if they are going to be negotiated rather than competitively bid, they should be brought to this committee for approval," Frasca said. "We should have a very full understanding of what we're doing, what we're getting into, and why we're doing it."

Derivatives "are very powerful instruments that can do a tremendous amount of good but they can also blow up in your hands," Frasca said. "I want to make sure that we don't have instruments on our books that blow up in our hands."

The MTA will present its preliminary 2009 budget on Thursday. The board has to approve a budget next month.

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