Government Payments to Wall Street for Auction-Rate Wreck Climb (Michael Quint)

  Sept. 9 (Bloomberg) -- Government officials are letting Wall Street banks pull off what makers of defective cars, computers and condos can't. After the collapse of a product banks created and controlled, they're charging the customers for repairs.

  The customers include taxpayers from New York to California, as well as not-for-profit institutions such as hospitals and universities. They sold auction-rate bonds, whose interest rates were set in periodic bidding. Since the market for those bonds began to fall apart last year, the issuers have had to pay an extra $2 billion in interest.

{xtypo_quote_left} ``We have a money-making opportunity,'' Seema Mohanty, a former investment banker at Zurich-based UBS and now a consultant in Pelham, New York, wrote in a Feb. 14 e-mail disclosed in the Massachusetts suit. ``They are desperate,'' she said, referring to issuers that wanted to get out of the bonds. {/xtypo_quote_left} 

  Now the borrowers are on the hook for possibly billions more in underwriting, legal and other costs for replacing the bonds with less expensive debt, according to data compiled by Bloomberg. Most of the payments are going to the same banks that ran the auctions and are accused by New York Attorney General Andrew Cuomo and states' securities regulators of understating the risks to clients. Investors have been promised $55.3 billion in refunds. Taxpayers aren't getting the same break.

  ``It's sad that taxpayers are paying the costs,'' said Christopher Taylor, former executive director of the Municipal Securities Rulemaking Board, an industry-controlled group based in Alexandria, Virginia. ``If they knew what was going on, they would be indignant.''

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