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Wall Street, Tobacco Companies In Finance Deal That Risks Bankrupting State and Local Governments

In the 1940s, Gallup found that 43 percent of Americans smoked at least one cigarette per week. In 2008, that number dropped to 21 percent. According to the CDC, the number of American smokers is now 18.1 percent, and like Gallup they too have marked a decline in the number of smokers. While this should be good news, there is a problem with this that hearkens back to the sub-prime mortgage, toxic asset scams that led to the Great Recession of 2008.

According to a report by non-profit journalism outlet ProPublica, Wall Street investors took advantage of the deal requiring tobacco companies “to pay for the healthcare costs of smoking” which pays “more than $200 billion in just the first 25 years of a legal settlement that required payments to be made in perpetuity.”

Called “payday loans,” Wall Street offered the beneficiaries cash upfront to be paid back through “capital appreciation bonds” and ProPublica found “they are…driving some [settlement beneficiaries] into bailouts or threatening to increase the cost of borrowing in the future.”

Like sub-prime mortgages, which assumed that real estate would continue to only increase in value, these tobacco bonds – some which don’t mature for 40 years – were calculated on generous assumptions about sales of cigarettes. Yet, as fewer people buy cigarettes state and local governments will have to dip into taxpayer dollars to pay what they owe.

ProPublica also reports that the “sure winners so far” are investment banks and that these governments are looking to double down rather than get out of investments that have “turned toxic.” So far they estimate banks have made $500 million simply from fees and “stand to make more as the governments look to rework old deals and try to get more tobacco cash upfront.”

However, perhaps some lessons were learned after 2008. ProPublica also reports that “Wall Street firms are already pitching their services to help unwind deals they helped create.”

Check out the article here to read the in-depth report in full.

Photo by Thomas Hawk via Flickr

About the author

Joshua M. Patton is a father, veteran, and writer living in Pittsburgh, PA. Along with news and current events, he writes about parenting, art, and personal stories. His serial fiction story "The Prophet Hustle" is available at JukePop.com and a forthcoming independent ebook about the cam-modeling industry "Dirty Little Windows" will be available later this summer.