By Cezary Podkul, ProPublica
In November 1998, attorneys general from across the country sealed a historic deal with the tobacco industry to pay for the health care costs of smoking. Going forward, nearly every cigarette sold would provide money to the states, territories and other governments involved -- more than $200 billion in just the first 25 years of a legal settlement that required payments to be made in perpetuity.
Then, Wall Street came knocking with an offer many state and local politicians found irresistible: Cash upfront for those governments willing to trade investors the right to some or all of their tobacco payments. State after state struck deals that critics derided as "payday loans" but proponents deemed only prudent. As designed, private investors -- not the taxpayers -- would take the hit if people smoked less and the tobacco money fell short.
Things haven't exactly worked out as planned.
A ProPublica analysis of more than 100 tobacco deals since the settlement found that they are creating new fiscal headaches for states, driving some into bailouts or threatening to increase the cost of borrowing in the future.
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Read more: 4 Stocks Warren Buffett Is Selling in 2014 "It's going to cost taxpayers, either directly or indirectly," said Craig Johnson, an associate professor of public finance at Indiana University in Bloomington who has studied tobacco bonds and CABs. "I don't doubt that at all." ProPublica's analysis is the first to measure the magnitude of the high-risk debt involved in the tobacco deals and to calculate how much Wall Street's dealmakers earned. It also shows how much of the tobacco money has been securitized -- that is, turned into payments that go to investors. As of this year, at least one out of every three dollars coming in under the settlement is pledged to investors, according to bond disclosures and payment data from the National Association of Attorneys General, which tracks the flow of funds. The sure winners so far: Investment bankers from Citigroup ( (C - Get Report)), the now defunct Bear Stearns and others who, along with consultants and lawyers, have pocketed more than $500 million in fees for their financial engineering, ProPublica estimates. They now stand to make more as the governments look to rework old deals and try to get even more tobacco cash upfront.