The Port Authority of New York and New Jersey is shelling out more than $2 million per month on three interest rate swaps tied to bonds that either never were issued or have long since been refunded.

In all, the agency has paid Wall Street banks more than $37 million since 2007 to cover the three swaps, which currently have a market value of approximately negative $145 million.  When combined with other swaps the agency has paid to terminate over the past two years, the total swaps payout crests $70 million since 2007.

The swaps are basically an exchange of a fixed payment by the PA for a variable one from a counterparty tied to a short term interest rate.  The derivatives, which are essentially a bet with another company on which way interest rates will move, are meant to protect the PA in the event that interest rates soar.  When used as a hedge, a swap is designed to lock in a low fixed rate payment to offset the long term risk of a variable rate bond.  The variable rate payment paid by the counter party is designed to track the rate paid by the PA on the bonds, offsetting each other and mitigating the risk of soaring rates. Read More