For banks that built up significant portfolios in the municipal interest rate swap business, it may be time to consider what to do when the customer isn't always right.

On Friday the Los Angeles City Council directed the city to ask the holders of two $158 million swaps to ease the terms of deals that one official pronounced a "rip-off." The measure followed advocacy by the Service Employees International Union, which has seized upon the cost of exiting swaps as a central point in a nationwide effort to blame banks for heavily indebted municipalities' service cuts.

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