Is it clear here that the board didn’t know the risks involved?
There is nothing wrong with deciding to take a financial risk for a payoff if you recognize that it is a risk and what the downside is (including those “unknown unknowns”. Is it clear the board didn’t make this choice with the facts (and the unknowns) in hand?
Many here are treating the fact that the board lost its gamble as evidence that it shouldn’t have taken the chance, and that’s not a self-evident truth. Often taking some risk saves a lot of money. And if you take on some risk, then occasionally you will get burned. That’s why it’s called risk.
If the board has clear evidence that there was fraud involved, that’s one thing. But if this is simply recrimination because the deal didn’t pan out, I’ve got a lot less sympathy. In that case, those who approved should man up, indicate they chose to take the risk to save the board a lot of money, and like risks occasionally do, it went sour.
No apology is needed. If they went in understanding everything including the risk of loss, then that can be a correct choice.
From the article, what it sounds like is had everything gone according to plan, the variable rate bonds would likely have resulted in lower interest payments. In fact, the powers that be (and/or the taxpayer) may have gotten upset (for legitimate reasons) had CPS not attempted this more financially complex method in order to cut down it’s interest payments.
What it sounds like is that there’s a built in guarantee for the people who buy these type of bonds at auction that they’ll be able to easily sell them at future auctions should they want to liquidate their holdings, but if they are unable to do so, the original issuer will increase the interest rate.
That is, the people that bought the bonds were promised they could easily sell them. If they couldn’t, then CPS would have to pay them a higher interest rate. As it turns out, the bond buyers couldn’t easily sell them and that clause kicked in. The “scandal” seems to be that Bank of America knew (or should have known) that the market for these types of bonds was in trouble and that the chance of this clause kicking in (resulting in higher rates), was much higher than they led CPS to believe.
I didn’t get into the details of the swaps, but it sounds like the analyst they hired half-assed his analysis, and they got burned on those as well.
Many here are treating the fact that the board lost its gamble as evidence that it shouldn’t have taken the chance, and that’s not a self-evident truth.
Not only that, but had things gone differently and the school had issued fixed-rate bonds at a higher rate, then people would probably be mad that CPS didn’t explore a way to borrow money at a lower rate.
While I don’t know if it constitutes fraud (or anything criminal), it sounds as if Bank of America should have known that the market for the sort of auction-rate bonds CPS was selling was in trouble. Whether or not they misrepresented the level of risk to CPS is something I don’t know.
But yeah, basically, the school district made a riskier decision that had the potential to save them million in interest payments, but it didn’t work, and it ended up costing them more.
That doesn’t sound any better to me. How is a public utility that operates by spending all the money it’s given supposed to pay interest on a loan. It’s not like public schools get a cut of their student’s earnings you know.
No they don’t tax student earnings. They essentially tax the earnings made by their student’s parents, via property taxes. At least that’s one source of money (there are others). This is one of the primary reasons why public schools are often better in nicer neighborhoods. They get more property tax money from the parents.
Sometimes one makes giant purchases. For an individual, it might be a house. For a school, it might be a new gym, or other buildings. Like home buyers, they may not people able to afford one giant lump sum payment. Instead, they borrow money to pay for it, and pay it back slowly over time.
An oops like this is probably the safest form of corrupt dealing when it is done with cold intent. Since it is done openly in public it is pretty safe, a knock on an officials reputation and can be translated into, in this case, say $100M. The cayman island account, or the consulting gig for a wife or kid even years later paying maybe paying a penny on the dollar makes sense. It also makes believing the oops explanation harder even if the city people were truly duped by the bond firm to add the tripwire insurance clauses. Oh wait, Chicago…
Do we know if it was anyone attached to the contracting parties who were able to use these swaps to cash up or were they only activated as a parachute to save losses?
I think they could have done it with foresight as well, the entire financial crisis could have been avoided with foresight. It did rely on too-good-to-be-true investments. We could avoid the next one too, you know, if we didn’t go back to doing the same damn thing we were doing before pretty much immediately after the crisis.
This is a criticism I can get behind, unfortunately. Without a quite radical shift in how we do a whole lot of things, everything we do is controlled by financiers.
The problem is that everyone is perpetually half-assing their analysis of everything, if they are even doing analysis and not just telling you what makes them the most money to tell you.
We’re letting the same people who created the global financial collapse continue to make all the decisions. At this point, if you believe bankers when they tell you they can save you money, you are a dupe. In any product that is a gamble they are the house. Of course anyone who was paying attention could have told you that pre-2008 as well.
