Governments Using Swaps Emulate Subprime Victims of Wall Street

Ask a Nobel Prize-winning economist what’s the difference between the mayor of Baltimore losing taxpayer money with derivatives sold by Wall Street and millions of Americans defaulting on subprime loans and he’ll say there isn’t any: State and local governments are victims of opaque financing they don’t understand, the same way individuals go broke on borrowing at rates too good to be true.

Martin O’Malley, Baltimore’s mayor in 2002, led his constituents into a financial trap that was supposed to save money on water, sewer and other projects. Now O’Malley, 48, is Maryland’s Democratic governor and the state’s biggest city faces a $90 million loss to get out of so-called auction-rate securities, the municipal equivalent of a floating-rate home loan that exploded when subprime lending collapsed and helped push Jefferson County, Alabama, into bankruptcy last week.