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Wednesday, 13 August 2014 06:40

Public Gains From Tobacco Settlement Go Up in Smoke as Wall Street Profits

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cigphoto(Photo: Azrasta)State and local governments who thought they could quickly close budget holes and implement some public projects with a quick infusion of tobbaco settlement money (from a 1998 settlement with state attorneys general) have generally seen their plans go up in smoke. To be precise, an article in Pro Publica predicts "A handful of states promised to repay $64 billion [to Wall Street] on just $3 billion advanced [in settlement funds]."

Wall Street often uses dazzling promises to secure deals such as this one, where they offer upfront cash in return for agreements that have ballooning interest rates. If sounds like the same as the adjustable-rate mortgage scheme before the economic collapse of 2008, that is because it more or less is, according to Pro Publica.  In the case of states and local governments borrowing relatively small amounts of tobaco settlement cash in advance while committing to long-term debt, the finanical vehicle are named capital appreciation bonds (CABs). Pro Publica calls them toxic:

The CABs promise gigantic payouts [to Wall Street financial firms] — as high as 76 times what’s borrowed — because nothing is due on them for decades. Meantime, interest compounds on both the principal and accumulating balance.

Defaults by state and local governments are rare, but rating agencies have been warning that tobacco bonds in general could go under en masse. Moody’s said in May that up to 80 percent of the tobacco issues it tracks are likely to default.

If we look at the cycle of what happened, the financial vulture attack on funds that were set aside for public benefit is clear.  For decades, lawsuits had been filed against Big Tobbaco without much success.  In 1998, however, attorney generals from across the nation reached an agreement with tobacco firms for payments to government bodies based on the number of cigarettes sold in a given year. Pro Publica estimates that this would yield "more than $200 billion in just the first 25 years of a legal settlement that required payments to be made in perpetuity."

State and other governmental units who were lured into getting some cash immediately signed the Wall Street loans without much actuarial analysis. As a result, some of these public entites are now paying off interest on the money that they borrowed from Walls Street with new funds coming in yearly from the tobacco settlement. It is somewhat similar to rolling over a high credit card balance every month and paying ongoing and growing interest instead of principal.

Furthermore, banks that arrange what are known as securitization agreements have raked in hundreds of millions of dollars in brokering fees, in addition to what financial firms are making in interest.

Pro Publica takes note that not only are states in hock to Wall Street for a stream of money that was supposed to be unencumbered, but that the funds are not even - in general - being used for their intended purpose:

But Michael Moore, who as Mississippi’s attorney general filed the initial lawsuit that led to the settlement, says the states that securitized made a “sucker bet” that diverted the winnings of the fight away from their intended purpose.

“The people making the decisions think that this money fell out of heaven,” Moore said. “No. This money was related to a public health battle, probably the biggest public health battle in our nation’s history, trying to combat the No. 1 cause of death and disease.”

It wouldn't be an exaggeration to assert that the potential for a large scale educational campaign against the health risks of cigarettes have - due to Wall Street - gone up in smoke.

Copyright, Truthout. May not be reprinted without permission.