Never Underestimate the Power of Negotiation
Banks and asset managers sell products and services. While they might wrap themselves in impressive jargon, complicated charts and graphs, and high-powered brand names, they still just sell stuff. Like any salesman, they hate losing a sale.
In How Banks Could Return the Favor, Gretchen Morgenson reports that many municipal bonds could be re-financed at much lower interest rates, and therefore lower costs to taxpayers, except for derivatives contracts buried in the bond offering.
Terminating the derivatives would give rise to significant termination fees. Public administrators are loathe to incur these fees.
Surprisingly …. almost shockingly … Morgenson also explains that many public fund administrators are hesitant to negotiate fee reductions with the banks. In essence, it appears that the administrators are intimated by the Banks.
However, imagine if you will, the reverse. Imagine that Bank A was on the bad end of a deal with Bank B. Do you think that Bank A would simply paying higher costs ad infinitum? Of course not.
Instead, Bank A would bring every bit of leverage into play in renegotiating the deal. In fact, that’s what bankers do. They love to negotiate, particularly where money is involved. It is a truism.
So, the public administrators should do a couple of things: project their banking needs for the next 5 years, contact multiple banks, begin a bidding war …. and, tell the bank which currently holds the derivatives contract that the entire banking relationship is up for review and that it is has been put out to bid. Furthermore, explain that re-negotiating the derivatives contract needs to part of their counter-proposal.
Then, let the chips fall where they may.
Remember, banks hate to lose customers; especially to competitors. I suspect that there are great savings to be reaped.