NEW YORK

MTA PAYS $39 MILLION TO CANCEL SWAP TRANSACTIONS

New York’s Metropolitan Transportation Authority paid at least $39 million this year to back out of swap transactions designed to hedge against rising interest rates, as benchmark yields fell to a 40-year low.

The authority paid Lehman Brothers Holdings and American International Group $22 million to end two interest-rate swaps entered into last September, under which the MTA agreed to pay a fixed rate at a specified future time in exchange for receiving a floating rate. In an April 29 public disclosure, the MTA said it ended a $500 million swap with Merrill Lynch & Company, paying the firm $17 million.

The use of swaps by state and local borrowers has ballooned in recent years as issuers have accepted Wall Street bankers’ advice to use complex derivatives to help lower debt costs and hedge against interest-rate swings. Unlike bonds, swaps aren’t regulated, reducing the transparency of a method of finance little understood by taxpayers who pay off public debt.

“When you get in derivatives you’re playing in a different ball game,” said Gary Gray, a visiting professor of finance at Penn State. “The benefits and the potential risks get magnified.”

For the MTA – which faces annual operating budget gaps of over $800 million over the next three years – $39 million could buy 20 subway cars or 73 buses, according to Neysa Pranger of the Straphanger’s Campaign. The MTA has $21 billion in outstanding debt, up 50% from five years ago, and $3.7 billion in outstanding swaps.

– Bloomberg News

ECONOMY

HOME PRICES SET RECORD AS RATES DECLINE

American home prices set another record in May as low borrowing costs and rising incomes spurred sales of previously owned homes to the second-fastest rate on record. The median home sales price increased to $207,000 from $205,000, the National Association of Realtors said yesterday in Washington. Purchases totaled an annualized 7.13 million, compared with April’s record 7.18 million pace.

– Bloomberg News

ENERGY

OIL SURGES TO RECORD ON CONCERN FUEL DEMAND WILL STRAIN OUTPUT

Crude oil prices in New York rose, touching a record $60 a barrel on speculation that surging demand for fuel will strain producers of grades that are suitable to make gasoline, diesel, and heating oil.

Crude oil for August delivery rose $1.31, or 2.3%, to $59.40 a barrel at the 2:30 p.m. close of Nymex floor trading. Earlier, it touched $60 a barrel, the highest price for a contract closest to expiration since trading began on Nymex in 1983.

– Bloomberg News