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Exotic Deals Put Denver Schools Deeper In Debt

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http://www.nytimes.com/2010/08/06/business/06denver.html?_r=1&ref=business

In the spring of 2008, the Denver public school system needed to plug a $400 million hole in its pension fund. Bankers at JPMorgan Chase offered what seemed to be a perfect solution.

The bankers said that the school system could raise $750 million in an exotic transaction that would eliminate the pension gap and save tens of millions of dollars annually in debt costs — money that could be plowed back into Denver’s classrooms, starved in recent years for funds.

To members of the Denver Board of Education, it sounded ideal. It was complex, involving several different financial institutions and transactions. But Michael F. Bennet, now a United States senator from Colorado who was superintendent of the school system at the time, and Thomas Boasberg, then the system’s chief operating officer, persuaded the seven-person board of the deal’s advantages, according to interviews with its members.

Rather than issue a plain-vanilla bond with a fixed interest rate, Denver followed its bankers’ suggestions and issued so-called pension certificates with a derivative attached; the debt carried a lower rate but it could also fluctuate if economic conditions changed.

The Denver schools essentially made the same choice some homeowners make: opting for a variable-rate mortgage that offered lower monthly payments, with the risk that they could rise, instead of a conventional, fixed-rate mortgage that offered larger, but unchanging, monthly payments.

The Denver school board unanimously approved the JPMorgan deal and it closed in April 2008, just weeks after a major investment bank, Bear Stearns, failed. In short order, the transaction went awry because of stress in the credit markets, problems with the bond insurer and plummeting interest rates.

Since it struck the deal, the school system has paid $115 million in interest and other fees, at least $25 million more than it originally anticipated.

To avoid mounting expenses, the Denver schools are looking to renegotiate the deal. But to unwind it all, the schools would have to pay the banks $81 million in termination fees, or about 19 percent of its $420 million payroll.

John MacPherson, a former interim executive director of the Denver Public Schools Retirement System, predicts that the 2008 deal will generate big costs to the school system down the road. “There is no happy ending to this,” Mr. MacPherson said. “Hindsight being 20-20, the pension certificates issuance is something that should never have happened.”

A spokesman at JPMorgan, which led the Denver deal, declined to comment. Royal Bank of Canada, which acted as the school system’s independent adviser even though it participated in the debt transaction, declined to comment. Denver school officials said that they had agreed to sign a conflict waiver with Royal Bank of Canada.

Denver isn’t the only city confronted with budgetary woes aggravated by esoteric financial deals that Wall Street peddled in the years before the credit crisis. Banks have said the deals were appropriate for the issuers and that no one could have predicted the broad financial collapse that put pressure on the transactions.

Still, some municipalities have found such arguments wanting and are pushing back.

Aren't the bankers nice people telling you how to save money, but yet end up costing you money because the economic climate changed which no one could have predicted...

They miss sell you a product and then to exit it costs you a fortune and they make a nice profit. Bonuses all round I think.

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I read stuff like this and my first reaction is that I could not 'sell' this kind of thing as my morals would not allow me.

But as I get older I get the distinct impression that I am one of the few who are not aboard the gravy train and begin to think that I am a mug.

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Have people not yet learned that when a bankster says he's got 'the perfect solution' for you he means you're about to get bum-f*cked and he's about to get rich?

It would appear not.

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http://www.nytimes.com/2010/08/06/business/06denver.html?_r=1&ref=business

Aren't the bankers nice people telling you how to save money, but yet end up costing you money because the economic climate changed which no one could have predicted...

They miss sell you a product and then to exit it costs you a fortune and they make a nice profit. Bonuses all round I think.

That is the issue when civil servant are allocating/taking a gamble on public money. They should have known that they should never ask a barber if they

need a haircut.

I wonder if the officers would have bought the 'swap' using their own money or if they would have done more due diligence if it was their own money at stake.

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  • 145 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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