From Wall Street to small towns, another tale of woe

Don Van Natta Jr. reports in today's New York Times from Lewisburg, Tennessee, population 10,413. (That is in non-metropolitan Marshall County, population 26,767, in the south central part of the state). The headline is "Firm Acted as Tutor in Selling Towns Risky Deals." The tale is one of a small city that has considerably increased its debt by following the the recommendation of its financial adviser, an investment bank called Morgan Keegan, to engage in a complex financial transaction that would lower interest rates on a bond to pay for a new sewers. Now, however, the annual interest rate payment on the bond has quadrupled--to $ 1 million.

Here's an excerpt that puts into national perspective what happened in Lewisburg:
Lewisburg is one of hundreds of small cities and counties across America reeling from their reliance in recent years on risky municipal bond derivatives that went bad. Municipalities that bought the derivatives were like homeowners with fixed-rate mortgages who refinanced by taking out lower-interest, variable-rate mortgages. But some local officials say they were not told, or did not understand, that interest rates could go much higher if economic conditions worsened — which, of course, they did.

I am not sure of the extent to which this is a small-town phenomenon, but it does strike me that such entities are less likely to have or be able to afford the sort of sophisticated legal advice that might head off such disastrous decisions.