News last week that the Mars School Board will pay $3.3 million to get out of a costly swaption contract bet is a reminder of the costs of the risky financial bets aggressively sold by Wall Street bankers a few years ago to school boards across Pennsylvania.

Some of the money to terminate the swaption deal, which is a bet on interest rate changes, will come from proceeds of another swaption deal Mars has that has made the district money. Still, almost $1 million of the $3.3 million termination fee will be paid for by being rolled into a new district bond issue.

While Mars officials noted that some swaption deals worked out to the district’s benefit, it’s worth noting that most swaptions sold to school districts were bad deals for the districts — but good deals for Wall Street banks.

That should not come as a surprise, given all that’s been learned about Wall Street’s practices since the financial crisis.

A 2008 investigative report by Bloomberg Markets Magazine highlighted the Erie City School District, which entered a swaption deal sold by JPMorgan Chase. Erie’s superintendent said JPMorgan told him all the school board had to do was OK the deal, then the bank would pay the financially strapped district $750,000. The school was told it was a low-risk bet and the upfront money was enticing.

The Bloomberg story revealed that the bank never told district officials that JPMorgan would make $1 million in fees, which was more than the district’s one-time payment. Three years after entering the deal, interest rates were moving in the wrong direction for the district, costing lots of money, so the district paid JPMorgan $2.9 million to get out of the deal.

Bloomberg reporters found that over a four-year period at least 500 deals involving $12 billion were sold by Wall Street bankers to Pennsylvania school districts. Interestingly, most of the deals were done outside of Philadelphia and Pittsburgh, the two largest cities in the state. That suggests the complexity of these deals would send up red flags at big-city districts with financially savvy board members or advisers. It looks like Wall Street aimed at easier targets.

A swaption is a complex financial contract between two parties betting on changes in interest rates. There is no competitive market to allow comparisons to see if a particular deal is good or not. These interest rate bets also are notoriously risky.

Swaptions are one kind of financial instruments known as derivatives, which respected investor Warren Buffett famously called “financial weapons of mass destruction.” Yet, Harrisburg lawmakers voted in September 2003 to allow swaptions to be sold to school districts — after lobbying by Wall Street, of course. Clearly, blame for bad swaption deals falls to school boards and to state lawmakers for allowing the deals to be sold by Wall Street banks to districts ill-suited to understand the risks.

These complex deals can serve legitimate functions for savvy investors and major financial institutions. Even then, they can go bad and cost millions or billions of dollars. One article titled “Hard lessons Learned from Swaptions” said, “Even the bright guys at the big institutions who have advanced degrees and trade full-time can screw up.”

Given that, what business did local school board officials, often lacking financial expertice, have in entering into these deals with Wall Street banks? Most board members could not have understood what they were getting into and the risks involved.

In 2009, while noting that Allegheny County school districts had done nearly $1 billion worth of swaption deals, state Auditor General Jack Wagner issued a statement saying swaptions put taxpayers’ money at too great a risk, adding, “Quite simply, the use of swaps amounts to gambling with public money.”

Mars and Erie were clearly not the only districts making the mistake of doing swaption deals with Wall Street banks. Butler School District paid $5 million to get out of a swaption deal gone bad in 2008. That deal gave the district an initial payment of $750,000, just like Erie. But then, when interest rates went against the district’s bet, it turned toxic and costly.

It’s unlikely school board members at any district across the state doing swaption deals, including Mars, Butler or Erie, really understood the risks involved. That’s a mistake that should never be repeated.