Banks win on Swaps while DPS loses courtesy of Bennet & Boasberg?

(Interesting and generating some comments – promoted by Danny the Red (hair))

Got the press release below forwarded to me by a friend who covers finance stories on a national desk and this just a couple days after an SEIU newsletter about “interest rate swaps.” Reading between the lines and taken along with the NY Times article and the recent SEIU newsletter, there are some very serious questions that need answers.  These Swaps are exactly what has sent Greece to the brink and are costing cities and states across the nation millions they already can’t afford to be losing.

Are banks like JP Morgan rolling in extra profits from Swap transactions at the cost of DPS students, teachers and retired DPS teachers counting on their pensions?

Just what kind of financial wizardry did Bennet and Boasberg do with DPS’ funds and what is the condition of the teachers’ pension fund? What if any impact does it have on PERA after that merger? Has the DPS School board been kept fully apprised of the financial condition of the district, the pension funds and any losses they’re eating after their current and former resident financial geniuses got them into this deal? Do the teachers know?

Who advised DPS on these transactions & what kind of fees were they paid?  

It’s not just the potentially escalating losses to DPS, but as was reported in an article ( http://trujilloenterprises.com… ) about swaps plaguing New Mexico, it means if any of the banks involved goes under, the value plummets.

Here’s how a newsletter from SEIU described these “Swaps”:

Sunday’s New York Times ran an article blowing the lid off a Wall Street scheme called “interest rate swaps” that are sucking money from cities and states across the country. The swap deals were originally sold to communities as a way to shield against unpredictable interest rates. But, when the banks crashed the economy, the rules of the game changed.

Now, all these swap deals are doing is generating pure profit for the big banks – and it’s being paid for with our tax dollars.

Help stop the swaps. Demand a public investigation into these shady deals: http://action.seiu.org/stopthe…

These swaps deals amount to the biggest Wall Street bailout you’ve never heard of – around $28 billion nationwide. The city of Oakland, CA alone is paying $5.2 million annually for a swap deal with Goldman Sachs. That’s enough to completely resolve the city’s outstanding budget gap – and avoid cuts to critical services. Instead, it’s being used to fill Goldman’s profit pool, while city services go on the chopping block.

Help expose swap deals in your community; demand an investigation: http://action.seiu.org/stopthe…

Taxpayers have already given enough to bailout Wall Street. But that hasn’t stopped them from taking more. With communities feeling the squeeze in a tough economy, the last thing we can afford to do is send billions of our local tax dollars to Wall Street.

Click here to contact your attorney general and demand a public investigation into interest rate swaps: http://action.seiu.org/stopthe…

Press release sent out today:

DENVER SCHOOL BOARD MEMBERS CALL FOR TRANSPARENCY IN DISTRICT’S INTEREST-RATE SWAPS

News Advisory – March 11, 2010

DENVER, CO.  On Sunday, March 7, 2010, The New York Times published an article entitled “The Swaps That Swallowed Your Town,” about interest rate swaps and their effect on school districts and municipalities. The article is available here http://www.nytimes.com/2010/03… .

In short, the story reports on the dramatic effect interest rate swaps are having on the budgets of public institutions and their ability to provide the services we expect from them. It also details the extent to which financial institutions took advantage of public officials and taxpayers in these transactions. Based on our preliminary research, we believe Denver Public Schools is being adversely affected by this kind of deal.

In 2007 DPS began to address pension-related issues and made a decision to raise $750 million for two primary purposes:

* To refinance pension certificates of participation from bonds issue in prior years, so as to redirect more money into the classroom

* To fully fund the DPS retirement system in anticipation of a merger between the DPS teachers retirement system and PERA, the Colorado retirement system.

DPS entered into negotiations with JP Morgan and CitiGroup, agreeing to issue fixed-rate bonds secured by DPS school buildings and other properties. DPS then began discussion to enter into an interest-rate swap agreement with JP Morgan, Bank of America and the Royal Bank of Canada. We believe that following ensued: DPS entered into a swap transaction, believing that interest rates would stay high. As recent financial news tells us, interest rates fell. We are concerned that this may have translated to a loss of taxpayer dollars.

The Times article specifically cites two major concerns with these types of transactions: a lack of understanding on the part of the public institutions and lack of transparency in the transaction as a whole. Because of our fiduciary responsibilities, we ask for a public accounting of these matters.

We, the Board Members of the Denver Public Schools listed below, believe we have a duty to the children and employees of our district, as well as to the taxpayers to make certain that all the facts concerning these transactions are made clear to the public.

Arturo Jimenez

Vice President,Director, District 5

Denver Board of Education

Jeanne Kaplan

Secretary,Director, District 3

Denver Board of Education

Andrea Mérida

Director, District 2

Denver Board of Education

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  1. themonk77 says:

    Ok, I start by saying I don’t know all that much about financial systems and financial products.  This does not seem to be a good thing for public funds or pension funds though.  Can someone with some financial insight let us know if this seems as bad as it sounds to me?

    • wade norris says:

      from NYT


         Across our very own country, municipalities, school districts, sewer systems and other tax-exempt debt issuers are ensnared in the derivatives mess.

         Like the credit default swaps that hid Greece’s obligations, the instruments weighing on our municipalities were brought to us by the creative minds of Wall Street. The rocket scientists crafting the products got backup from swap advisers, a group of conflicted promoters who consulted municipalities and other issuers. Both of these camps peddled swaps as a way for tax-exempt debt issuers to reduce their financing costs.

         Now, however, the promised benefits of these swaps have mutated into enormous, and sometimes smothering, expenses. Making matters worse, issuers who want out of the arrangements – swap contracts typically run for 30 years – must pay up in order to escape.

         That’s right. Issuers are essentially paying twice for flawed deals that bestowed great riches on the bankers and advisers who sold them. Taxpayers should be outraged, but to be angry you have to be informed – and few taxpayers may even know that the complicated arrangements exist.

      Bennet sounds like he made a big mistake on this decision as the head of DPS

      • themonk77 says:

        Its sounding like he chose one helluva financial product.  Are there any consequences for this sort of thing?

      • These instruments were created by none other that Howie Hubler the mental midget who earned millions for his incompetence and ignorance and who stands out on Wall Street as the hedge fund manager who lost the most money on one financial instrument in Wall Street’s entire history. He actually believed his own bullshit on Collateralized Debt Obligations CDOs.  What they did was to repackage the worst of the worst predatory loans that they thought would go bad and managed to get the rating agencies to give these new piles of shit triple a ratings. Morgan Stanley would then invest in these financial instruments to the tune of billions of dollars.  

        But back to why he created the interest rate swaps. While in a different position at Morgan Stanley as some kind of bond manager Howie Hubler prepared their securitized mortgage backed bonds. These loans would sit for months. Howie wanted Morgan Stanley to be protected against fluctuations in interest rates so he created these instruments called interest rate swaps which basically was an insurance product that insured against interest rates going up.  

        The reason these products are losing money today for schools and other municipalities is because the government is keeping interest rates artificially low by not charging banks any interest on the money they lend to the banks.  In other words they don’t pay interest on the money they borrow from the fed – 0% interest.  Because these instruments bet on interest rates going up instead of staying low these insurance instruments are worthless.  

        Now was Bennet familiar with what would happen to these instruments if “cramdown” became law and a judge could modify the loans of millions of homeowners by forcing the banks to accept lower interest rates for the life of the loan? The interest rate swaps would be worthless if that occurred.  Did that impact his decision to vote no on the “cramdown” legislation?  I think the author of this diary is correct and Bennet needs to answer some questions about his involvement and what role he played in purchasing these instruments especially now that they are worthless.  And how will this define Bennet’s role and his position on banking reform.  

        Great post!  

  2. annsinyck says:

    Did anyone see Channel 7’s story on the 4:00 PM news? What was Tom Boasberg talking about swapping a 7.5% interest rate for a variable 8% interest rate?  I don’t work on Wall Street, but how does anyone pay 8% for a variable rate loan these days?  The people running Denver Public Schools must be as bad at finance as they are at running a school district.

  3. cscottrun4it says:

    I guess, like Ann, I am a newbie. I am a member of DEAN, or the Denver Education Advocacy Network, and one of my fellow members pointed me at this blog.

    Four DEAN members have been looking at the swap issue in DPS since about the first of the year. None of us is a financier, but our working group has a corporate accountant, someone in marketing, a mom, and me, a government programs analyst.  We have struggled to figure most of the swap issues out over the past 3 months. We have been lucky to have some support from the school board members who have shared documents they received from various people inside and outside the District.  I am happy to share what we think we know, just as we shared it with the Board members.

    The press release from Jeannie, Arturo, and Andrea is fundamentally correct.  DPS entered into synthetic fixed-rate swaps with JP Morgan, Bank of America, and the Royal Bank of Canada, or RBC. These types of swaps are actually pretty common in business finance.  Moreover, this type of swap has some pretty clear best practices governing it.

    Most importantly, at the swap’s outset, the terms should result in a fair value of $0 for both parties, meaning neither party has an economic advantage over the other.  To use a poker metaphor, both parties come to the table with no hand of cards and no knowledge of how the cards will fall.

    The DPS swaps do not seem to follow this best practice.  At the swaps’ outset, DPS appears to already have been in a position to loose money.  

    In a swap, two parties agree to exchange interest rates — one at fixed rate and the other at variable rate.  In a synthetic fixed rate transaction, the party exchanging the fixed rate issues bonds at the same rate it is receiving from the counterparty providing the variable rate. So, DPS issued its bonds at a rate tied to the LIBOR just as it was receiving payments from JP Morgan based on the 1-month LIBOR.

    When DPS entered into the swap in May 2008, the LIBOR was already 2 points below the DPS fixed rate of 4.859%.  That month, DPS lost $1.5 million dollars on the swaps, excluding whatever money it had to use to bring the bonds to market.

    Since its inception, the LIBOR has not typically been above 5%, the notional break even point for the District.  Since 2000, the LIBOR has only been above 5% for about 24 months, the period between late 2005 and late 2007.   Since 1989, the LIBOR has a strong downward trend — beginning in 1989 at a rate over 10%, never to be seen again, and ending at a historic low, below 1%.  

    There was a period between 1994 and 2000 when the LIBOR was above 5% consistently, but given the historic data and the fact that we were in the internet bubble during which time the rate was that high, it is unlikely we will see that rate again soon.

    Therefore, I’m not sure how anyone could conclude that DPS would come out even in the swap at 4.895% over a 30-year period, let alone ahead in the game.

    To test our theory, our group ran a very simple calculation comparing the amount that DPS paid to the swap counterparties based on a 4.850% rate on a principal of $750 million vs. the amount rebated by the counterparties at the 1-month LIBOR.  This calculation shows DPS being $51 million upside down on the swaps since May 2008.

    Further, the DPS annual financial report for 2009 states that the swaps had a present fair values of ($81 million) as of June 30, 2009. That would mean it would cost DPS $81.3 million to get out of the swaps, if I am understanding the meaning of fair present value in this game.

    When our group looked at how the recently signed SB10-1 might affect all of this, we found testimony by a guy from Pueblo that stated DPS was $78 million underwater on the swaps, and he was concerned about the effect this might have on PERA, which helped confirm our thinking.  

    Our numbers do not include fees associated with executing the swaps or issuing the bonds.  For example, one of our team called Fidelity about the bonds to see what they were selling for and he was told that the bonds had failed at auction.

    DPS protected itself from this problem by including something called a liquidity provider in the bond issuing process, in this case a company called Dexia out of France.  The liquidity provider’s job is to buy bonds that cannot be sold, for a fee, of course.  Based on the bond offering document, that fee would be ~$25 million per year if none of the bonds sold.

    I spoke with Jeremy Meyer at the Denver Post this evening.  According to Jeremy, DPS may have entered into some sort of instrument to make the bonds more attractive.  As I said above, the bonds’ interest rate was tied to the  LIBOR, which is probably why no one was buying them. However, it looks like DPS might be using something called an inverse floating rate coupon for its bonds.  

    Wikipedia says, “With an inverse floater, as interest rates rise the coupon rate falls.” I think the coupon is the interest carried by the bonds themselves. So, I am not sure how this helps DPS. With the LIBOR at 0.2%, I would think the interest rate on the bonds would have to be sky high. I guess if DPS issued some of the bonds using the inverse rate and some using the straight LIBOR, the costs of the bonds might even out, but that wouldn’t address the losses associated with the swaps themselves. They are a separate transaction entirely.

    In the end, sadly, it looks like DPS is bleeding money at a time when they are already carrying $1.6 million in debt and are $654 million upside down on their balance sheet, at least according to their 2009 financial report.

    • MADCO says:

      Can you provide more explanation or a source that describes what you call the “best practice”?

      Is DPS the only CO school district participating or that uses swaps?

      What was the DPS instrument that was swapped from? Ie, was it an interest bearing instrument paying DPS? If so, what was it?   Or was it debt DPS was paying- and if so what was it?

      Either way  – was DPS’s interest rate fixed or variable? And what was DPS’s motivation for the swap?

      thanks for whatever inf. or sources you provide

      • cscottrun4it says:

        Sorry for not citing sources better.

        Can you provide more explanation or a source that describes what you call the “best practice”? — I had to use a few sources for this.  They include —

        Understanding interest rate swaps By Mary S. Ludwig

        Synthetic Fixed Rate – Interest Rate Swap by George K Baum & Company

        Negotiating Synthetic Fixed Rate Loans, Derivatives White Paper, FEBRUARY 2010, Number 7, by Porter White and Company

        There are many other sources available if you search Google using the search term “synthetic fixed rate swap.” These are just the three I found most helpful.

        Is DPS the only CO school district participating or that uses swaps? — I’m not sure, but what I am sure of is that DPS is $1.6 billion in debt and $654 million upside down on its balance sheet according to its 2009 Comprehensive Annual Financial Report, or CAFR.  The link to this document on DPS’ web site is currently broken so I have loaded it here: 2008/2009 CAFR. Check page 36 of the PDF.

        We checked the balance sheets of other school districts in Colorado. JeffCo is $587 million in the black. Douglas County schools are $114 million in the black. Adams 50 is $29 million in the black. DPS is even worse off the Detroit Public Schools, which is $486 million in the red.

        (To verify these numbers, check the CAFRs for each of these districts.)

        What was the DPS instrument that was swapped from? Ie, was it an interest bearing instrument paying DPS? If so, what was it?   Or was it debt DPS was paying- and if so what was it? — Swaps are all about an exchange of interest rates rather than the principal or debt associated with the interest rates.

        So, DPS swapped a fixed interest rate (4.859%) for a variable rate tied to the 1-month LIBOR (at 0.2291% for February 2010).

        Under the swap, DPS and its swap counterparties exchange checks each month. The amounts of these checks are based on the interest on the principal amount of the bonds, in this case $750 million.

        So, for February 2010, DPS wrote a check to its swap counterparties for $3 million [($750 million * 4.859%)/12] and received a check back from the counterparties (JP Morgan/Bank of America/Royal Bank of Canada) for $288,000 [($750 million * 0.2291%)/12].  

        The swap was not trading debt or the principal raised by the bonds. It is purely about trading money based on interest rates. As stated above, it was a gamble.  DPS thought it would outsmart JP Morgan and company on the market.

        • BICora says:

          I don’t follow.

          Was DPS paying only 4.859% on their debt before the swap?

          What is the Den Post talking about when they wrote

          The transaction allowed the district to pay off a $400 million pension shortfall and refinance about $300 million of debt at a lower interest rate than its original 8.5 percent.

          That meant the district’s interest rate stays at just under 6 percent over 30 years.

          Is the “just under 6%” the 4.859% yuo are referring to?

          • cscottrun4it says:

            If you look at page 70 of the 2008/2009 CAFR under the “Demand Bonds” heading, you’ll see where the District talks about refinancing the bonds. DPS was paying 8.5% on the bonds they refinanced.  Based on the difference between the pre-refinanced rate of 8.5% and the 4.859% interest rate they received in 2008, the District could save ~$11 million per year as a result of the different interest rates.

            However, DPS executed the swaps, which are based on a derivative tied to the LIBOR. Each month, DPS has to always write a check to cover its interest on the principal of $750 million.  That interest is based on the 4.859% rate. DPS’ check is written to the swap counter party, who, in turn, writes a check based on the 1-month LIBOR. The resulting loss effectively chewed up last year’s $11 million in savings because, during 2008/2009, DPS lost nearly $34 million on its swaps.

            If, however, the 1-month LIBOR were to go up to 6%, DPS could make money on the swap.  Under this scenario, DPS would write its monthly check for $3 million and it would receive a check from the swap counterparties for $3.75 million, a profit of $750k.  That is the bet DPS made.

        • MADCO says:

          Christopher-

          would it be accurate to say if DPS hadn’t done the swap transaction, they’d still have $400mm at 8.5% and they would have had to come up the $300mm at market rates at the time?

          I can see how (though I haven’t studied the books as you apparently have) a declining interest rate would make the swap less valueable.  But if the alternative was 8.5% on $700mm, I’m not sure I see where it was a bad move.  At least looking forward.

          In hindsight?  Well, in hindsight, …. I know plenty of ex-spouses who could tell us all we would want to know about hind sight.

          • cscottrun4it says:

            DPS got rid of the 8.5% rate as part of the refinance.  As I understand it, if DPS hadn’t done the swaps, they would have a 4.859% annual interest rate.  They would be saving the $11 million per year resulting from the interest rate difference (8.5% vs 4.859%), in theory, depending on the bond issuance costs and the interest rates required to get investors to buy the bonds.  

    • Thank you Mr. Scott for your detailed explanation of these Swaps. From what you say it sounds like it could be pretty bad. If I’m understanding correctly the only way the deal made sense or was profitable was if interest rates were going up and at the time they did this they were already below that break-even point and were on a pretty solid downward trend.

      I don’t know what the whole story is but think there needs to be a very thorough investigation of the whole transaction, who was involved, why they did this and what exactly the financial condition is for the district and the pension fund.

      If as Boasberg claims in the Denver Post – http://www.denverpost.com/ci_1… – there is no problem, then call for a public hearing, invite all of the school board members, the teachers and the financial advisors involved in the deal to explain everything. An explanation is all that’s needed not snide comments and condescension to the people elected to protect and oversee the school district’s finances.

      What I do find particularly offensive though was Boasberg’s comment in the Denver Post dismissing the almost one half of the school board who are raising questions as “a few disgruntled board members who are seeking to create a political controversy where no controversy exists.” Compared to the description laid out by Mr. Scott, their questions seem awfully mild. More importantly Mr. Boasberg, these are your bosses not some teacher or school counselor unhappy that you fired them. These people were actually elected by the people not jammed down their throat by the outgoing Super in an “search” for a new Superintendent that involved no search or interviews or anointed to the Senate by the vote of what Governor who ignored the people. The contempt by Boasberg for his bosses and the elected leaders of DPS is telling and disgusting.

      It was nice that the Denver Post covered the story but they might want to try having a financial or business reporter do the reporting instead of their education reporter who probably doesn’t understand these transactions any better than most of us would. No dig on the reporter – he covered the story but I think this kind of thing needs a reporter who can really dissect what both sides are saying and get to the bottom of this.

      • Danny the Red (hair)Danny the Red (hair) says:

        I am still concerned by some of the things  mentioned by Christopher Scott.

        I think a public hearing is not appropriate as the issues are too complex and not conducive to discussion by people without the expertise to analyze the information.

        I do support more disclosure and perhaps an independent audit report, but a board screamfest would not be productive.

      • BICora says:

        “… it sounds like it could be pretty bad.”

        How so?

        I read what Mr Scott wrote, and I would need more detail and understanding to form an opinion. How did you form yours? Or is it enough for you (and Wade) to know that Senator Bennet is the former DPS Superintendent?  

        “thorough investigation ”

        Agreed. And here’s where my political instincts smell something.



        “All we are trying to do is get facts,” said Jeannie Kaplan, a board member. “My major concern is I honestly don’t know what this is about.”

        Are you or Ms Kaplan alleging that the Board is being left in the dark?  Why raise some complicated and misleading questions in a “news release”?  Unless the Board isn’t being informed, then there is clearly a communication problem that has nothing to do with the fniancial transacion.

        “…(if) there is no problem, then call for a public hearing, invite all of the school board members, the teachers and the financial advisors involved in the deal to explain everything.”

        If there is no problem, I would think it is more useful to have the uninformed Board members get informed.  If when they udnerstand they think there is a problem, then get an audit or whatever extra ordinary accounting is required to understand. And then if there is a problem- have the open house you describe.

        From the Denver Post article,

        The transaction allowed the district to pay off a $400 million pension shortfall and refinance about $300 million of debt at a lower interest rate than its original 8.5 percent.

        That meant the district’s interest rate stays at just under 6 percent over 30 years. The bank takes the risk if rates go above that mark, but the bank benefits when the rates are lower. On Wednesday, the bank’s rate was 0.250 percent.

        So it sounds like DPS refinanced some debt into a lower rate and locked that rate in for a longer term.  It doesn’t sound like DPS was speculating on interest rates nor that that it had any to do with “believing that interest rates would stay high”.

        By all means the Board should be informed and should work to understand how and what the financial obligations and commitments of the DPS are and will be.  This doesn’t seem like a good way to do that.

        It does however seem like a good way to raise a complicated issue with some large numbers and attempt to embarrass Superintendent Boasberg, former DPS Board members and maybe even former DPS Superintendent, Senator Bennet.

         

        • cscottrun4it says:

          If you look at page 70 of the 2008/2009 CAFR under the “Demand Bonds” heading, you’ll see where the District talks about refinancing the bonds. DPS was paying 8.5% on the bonds they refinanced.  Based on the difference between the pre-refinanced rate of 8.5% and the 4.859% interest rate they received in 2008, the District could save ~$11 million per year as a result of the different interest rates.

          However, DPS executed the swaps, which are based on a derivative tied to the LIBOR. Each month, DPS has to always write a check to cover its interest on the principal of $750 million.  That interest is based on the 4.859% rate. DPS’ check is written to the swap counter party, who, in turn, writes a check based on the 1-month LIBOR. The resulting loss effectively chewed up last year’s $11 million in savings because, during 2008/2009, DPS lost nearly $34 million on its swaps.

          If, however, the 1-month LIBOR were to go up to 6%, DPS could make money on the swap.  Under this scenario, DPS would write its monthly check for $3 million and it would receive a check from the swap counterparties for $3.75 million, a profit of $750k.  That is the bet DPS made.

    • Middle of the Road says:

      Thanks for that background.  

    • Danny the Red (hair)Danny the Red (hair) says:

      There is a lot of information here that I need to digest.

      Before I was an attorney I was a fixed income research analyst, trader and portfolio manager, I came in to the business as Orange county was exploding. http://www.erisk.com/learning/

      It is not clear from the description, but basically he was investing in inverse floaters and similar instruments.

      I need to know more about what DPS was doing and with which part of its investment portfolio.

      • BICora says:

        but I thught that Orange County’s scam was all about time periods. Investing long term and borrowing short term or the other way around.

        • Danny the Red (hair)Danny the Red (hair) says:

          Just gross incompetence.

          Citron used a variety of strategies to make leveraged interest rate bets, Inverse Floaters were one of them.  He used other inappropriate strategies, but I am just addressing inverse floaters.  

          • MADCO says:

            Citron also wasn’t that forthcoming about how and why he did what he did. So it felt scam-ish. Though, if (IFF) the portfolio could have found a 6-9 month bridge, and been allowed a more orderly unwinding it would have greatly mitigated the damage.

            There was a component of his “hedge” that was flawed because he had was leveraged incorrectly against a variety of durations  Thank god it was all the same currency.

    • Middle of the Road says:

      Are you the same Christopher Scott that ran for the DPS Board in 2009 and lost to Mary Seawall, 29.5% to 70%? I believe you ran on an anti-Bennet campaign, no?

      Like Wade, I get suspicious when someone opens an account here. I guess Wade and I are just two old cynics that can’t help but wonder if there’s an agenda involved.

      • cscottrun4it says:

        I am that Christopher Scott, and you give me more credit than I deserve — I lost 20% to 80%.  After the election, I went back to doing what I was doing before running for office — working with a metro-wide organization of parents (DEAN) to improve our public schools.  If you’d like to contact me or get involved, my e-mail is made public through the site.

      • Prog-Matic says:

        Yeah, that’s the same Christopher Scott who was rabidly anti Bennet during his campaign. Is it coincidence that he’s still at it?  

        • cscottrun4it says:

          I have presented the facts as I understand them.  I have cited every conclusion I have made so others can check my thinking. If I have not, I will do my best to correct this, as I have above.

          Fundamentally, if you do not agree with my conclusions, you can make a counter argument based on the facts. You have access to all the documents I have cited.  If you do not, I am happy to provide whatever information I have.  Just ask. I’ll get it to the community one way or another.

          As for my sudden appearance on Colorado Pols, I honestly didn’t know the blog existed, but I have to say you guys sure know how to throw a good party.  

          Last, are the posts saying my motives are political mean that my insights and conclusions are unwelcome?  That would seem somewhat hypocritical given that the whole site is a political blog.

          • MADCO says:

            Doesn’t mean your data is bad.

            It can, sort of, call into question your analysis.

            I mean are you saying there was misappropriation or just that a highly technical interest rate hedge has performed less well than forecast or desired?

    • MD Routine says:

      I think I can clarify a couple of things.  I have no vested interested in this deal and I’m not familiar with this deal, but I understand swaps.  

      First, LIBOR float-to-fixed rate swaps never have an inputted equal advantage at close.  If you understand anything about the term structure of interest rates, you understand that the longer term the interest rate, the higher the rate due to inflation and implied interest rate uncertainty.  This is why 3-month Treasuries have a lower yield than 30-year treasuries.  As such, the out of the money situation at close is simply the cost to fix the rate over a longer term.  

      Second, the post above suggests DPS should have done a floating rate deal.  It is very easy in hindsight to say this should be the case, but floating rate transactions are essentially a risk in and of itself by assuming LIBOR remains low.  Given that the majority of economists are predicting inflation, LIBOR has no where to go but up. I question the LIBOR data in the post above, because LIBOR has historically been above the fixed LIBOR swap DPS locked in.  If history is an indicator of the future, DPS will eventually come out ahead on the swap.  

      Third, locking in a swap adds certainty to DPS’ planning.  If you know what your rate is, you can plan for it.  If you have a floating rate, you make an assumption.  I don’t know the poster above, but no one can predict where rates will go over the long-term.

      Fourth, being underwater in a swap is only an issue if you plan on unwinding it. As such, there is no cash exchanged for the unwinding as is implied above.  Also, every bank has a different way to calculate the mark-to-market on the swap, so the data from the individual from Pueblo is probably flawed.

      Last point. The poster above more or less advocates a floating rate strategy.  This is like doing a 1-year ARM rather than a 30 year mortgage.  In the short-run the rate is lower, but over the long-term, the 30-year mortgage removes interest rate fluctuations.

      America and Americans are really good at assessing judgement in hindsight like the poster above.  I suggest readers think of the interest rate swap as a tool to protect DPS financing from fluctuations in interest rates, rather than a gamble in letting the bond issuance float as the reader above advocates.    

  4. dwyer says:

    The politics of it are that Boasberg “controls,” IMHO, four members of Denver Board of Eduction.  The other  three, Kaplan, JImenez and Merida are “out of the loop.”:  Kaplan has complained that she is not being informed of the Superintendent’s decisions.

    It is outrageous that a Superintendent, who is supposed to be subordinate to the elected members of the board, would attack three members as he reportedly did.  The silence of the other board members should be grounds for recall.

    Remember, gang, when Merida made arrangements to be sworn in so that she could vote on the very issues upon which she had been elected?  It was Boasberg who attacked her.  Remember how there was a “progressive” pile on?…..Thank you ColoradoPols.

    This whole thing stinks to high heaven.  What I don’t know is to what degree the Bennet/Romanoff figures into this.

    Does anyone?  Is Kaplan a Romanoff supporter??

    Thanks.

      • dwyer says:

        You may be right r1 that Easley is a swing vote.  However, I cannot think of one vote in which he sided with Kaplan, Jimenez and Merida, against the other members.   Can you?  I am asking seriously, because I don’t know.

        • raymond1 says:

          I confess I don’t follow the votes well enough to hae examples, so you may well be right – but easley has been in office for only a few months, so I wouldn’t base a fIrm opinion on voting records yet. But I do know that he’s seen by the pro-charter folks as thinking Boasberg goes too far with charters (hence their support for his opponent, jones), yet Merida and allies think he’s too pro-Boasberg. So he’s either a thoughtful moderate or wishy-washy but I’d be shocked if over the course of his tern he proves to be a reliable pro-Boasberg or pro-charter vote

    • Middle of the Road says:

      http://www.andrewromanoff.com/

      Both Kaplan and Jimenez also voted for the deal–perhaps one of them will stop by here with more details on that.

      Also, more background here:http://www.thedenverchannel.com/video/22814983/index.html

      And I agree with David–the Superintendent reports to the Board. If some of the Board members have ulterior motives or agendas here, it will become clear soon enough. One would be politically naive not to question the timing of this.

      I’m starting to get the feeling that there’s lots of smoke here but no fire. However, I’d like to see a public hearing so that all the little behind the scenes BS here is given full exposure and sees the light of day.

      • redstateblues says:

        So Kaplan and Jimenez both voted for the deal, but then send out a press release criticizing it. And it turns out Kaplan has hosted house parties for Romanoff.

        I’m fine discussing the facts of this deal, but let’s also shed some light on why certain people might want to rush this out a week before caucus. Maybe they just forgot they voted for it, and when they say that they want the details made public, maybe they were just trying to rekindle their own memories of why they voted for it in the first place.

        • Danny the Red (hair)Danny the Red (hair) says:

          I am beginning to believe this is a driveby tarring.

          • dwyer says:

            But, the board members cite the NYT article which was published five days ago. Is this coincidence?  It would seem to me to be prudent for the board members to ask for information based on the NYT article.  Now, releasing a press release documenting their request for that information might, indeed, be political in light of the upcoming primary fights.

            It would be interesting to know the motivation behind the press release, not  necessarily the quest for information.

            The latter would appear to be due diligence.  

          • BICora says:

            Interest rate swaps sound mysterious and risky.  It’s a finance thing and we all know who the finance guy is.

            The dollar amounts are large, involving both DPS and the teachers union (pension), all three are hot hot buttons to Colorado voters.

            And Kaplan innocently is quoted saying she just wants facts and to understand what it’s all about.  Who could fault her for that?

            Except why did she vote for it if she didn’t understand it?

            • The realistThe realist says:

              People make mistakes in voting all the time – and this story of a voting mistake didn’t draw one comment earlier this week:  http://www.chieftain.com/artic

              So, we shouldn’t get sidetracked too far in motivations, or lack of them, for this current story.  If DPS or any other governmental entity is suffering financially due to a complicated financial instrument that few could be expected to understand, then the history of how the decision was made, who made the decisions, and was DPS (or any other government entity) taken advantage of, should be researched and told.  If we don’t figure out that such complicated financial devices need to be better monitored and regulated, then we’ll just continue to repeat our mistakes.

              • BICora says:

                It would have drawn all kinds of comment if either elected legislator subsequently put out a press release claiming that either bill was somehow contributing to impropriety on the part of the Speaker of the House, current or former.

                By all means, the Board should be informed. Absolutely, Superintendent Boasberg should provide whatever information the Direcotors are requesting so that they can understand it.  And if he’s not, then a press release fromt he directos might make more sense.

                And now you’re also adding the claim that whatever this “complicated financial device” was, it was inadequately regulated or monitored? Why do you think that?

                • The realistThe realist says:

                  worthless piece of crap in the financial industry that brought the US to its knees.  Please note that I didn’t say it was the same or similar – it just REMINDS of that experience.  And we still haven’t adequately dealt with that disaster in federal regulations.

                  • BICora says:

                    Which worthless poc would that be?

                    And it’s the “reminds” part that has me thinking that this is a politically motivated cry of fire.  It sounds potentially horrible. How could the Board be so shortsighted? Even Board members who voted yes are saying they just don’t understand. Who did what when and why?

                    See, I’m no bond trader but the politics smell fishy.

        • Middle of the Road says:

          Four days before caucus, news dump on a Friday? No, I’m sure there’s nothing remotely suspicious about that, particularly that two of the three people that are now so concerned about the deal also voted for it.

          Do these people really think the Internet does not exist and that most of us can’t find relevant information in about 10 minutes?

          Hard to believe what looks to be a smear job is front paged but maybe it’s for the best–time to start shedding a little daylight on some of the last minute desperation tactics coming from some of AR’s supporters.

          • Tazistan JenTazistan Jen says:

            I predict no one will pay any attention to this because it is way too wonky and hard to follow. I bet not one person brings it up at my caucus.

            • BICora says:

              But it won’t come up with calrity and fact.

              It will come up in a there was a recent article, press release, talk of, etc about financial wheeling-dealing by DPS

              The emphasis will be on the mysteriousness of the “financial” component, why the Board doesn’t even understand it.

        • I agree that Kaplan & Jimenez need to explain why they voted for this deal & there are valid questions on the timing. But Boasberg needs to answer a lot of questions too. The timing may be political but that doesn’t change any facts underlying the financial issues at DPS and with these deals. I’d also Luke to know what Bennet & Boasberg told the board before they voted on it, how much time they had to review the deal & who if anybody was advising them. Other than Bennet’s buddy Bruce Hoyt I don’t think anybody on that board has the financial background to really understand derivatives & interest rate swaps.

          Let’s get some answers from all involved about what the situation is & how DPS got there.

          • redstateblues says:

            It’s very complicated. I’m not sure I understand it fully myself.

            And to be clear, I was saying that the driveby here is coming from Kaplan and Jimenez–the people on the board who voted for the interest rate swap. It would have been shockingly bad blogging if this story hadn’t been posted.

        • skeptic1 says:

          perhaps jiminez and kaplan should take the fall too if the targets are bennet and boasberg.  

  5. dwyer says:

    I am just concerned about what I think is the surrender of the majority of board members to the dictates of Boasberg and his unseemly  attacks on the three other board members  who are asking questions.

    What I also recall is that there was an open seat on the governing board of the pension fund for DPS, or something to that effect.  The DCTA had a candidate who had been recommended and she was a active teacher.  At the meeting, Boasberg  brought forth his own candidate who was a retired DPS employee, Waynce Eckerling….again, I could be mistaken.  I am just doing this from my aging memory.  Anyway, Kaplan again raised questions.  Didn’t matter, Boasberg had the votes and Eckerling is on that board, whatever it is.

  6. That’s what the thread sounds like to me.

    It says, we don’t understand these products and  the econonmy went south.

    The logical thing to do would be to renegotiate under new economic circumstances if the products aren’t doing what they were intended to do.

    That would be the job of the current school adminstrations.

    Really, the hyperbole should stop.

    I’m not holding my breath.

  7. Joseph David says:

     I do have to think that the timing of this discussion is perhaps unfortunate. However, I really think this needs to be explored further. The practice of investing retirement or public  funds in anything other than guaranteed returns has always seemed a poor one to me.

     I heard Ms Merida on Mario’s show. I thought she did a stand up job, including herself in culpability when apparently she hadn’t been elected to the DPS board when these decisions where made. I liked that.  

    • One thing that is clear the last 18 months is that there are no guarantees in the financial markets.

      Contrary to the general backlash, I don’t fault either the Bush Administration nor the Obama Admnsitration for keeping BOA, CHASE, and CITI open. I’m sure the majority of the public likes to think that they can trust they can cash their paychecks.

      In my opinion, the fault lies in lack of regulation of derivatives, and no oversight of the rating agencies.  

    • BICora says:

      The DenPost article says DPS refinanced some existing debt into a lower interest rate. Seems like a good move.  

  8. Prog-Matic says:

    Arturo Jimenez, Jeanne Kaplan, Andrea MГ©rida, Christopher Scott, & Jeremy Meyer are in a cabal against school reform. Their opinions and facts should be viewed as highly suspect on this and any other issues where they can make either Bennet or school reform look bad.  Yes, these debit swaps do seem odd and are very confusing, but take nothing that any of the cabal says as anywhere near credible.  

    They all have axes to grind and vehemently hate school reformers. Of course they hate Bennet because be backed reform.  And of course they’re trying to hurt his chances in the Senate race.

    Furthermore, Jermey Meyer is not an objective journalist when it comes to school reform issues. His stories on DPS would be better placed on the opinion page.

    I hope the Post puts a real journalist on the case and gets to the bottom of this. Thus far though, you need to consider the source(s), and the timing of all this.  

    • dwyer says:

      It is wrong to lump Scott, who was defeated, and Meyer, who I think, goes overboard NOT to report all that is going on at DPS as part of a “cabal.”

      What you are doing, P-M, is diminishing the role of ELECTED Board Members.  I don’t like that.

      The very best way to counter any political motive from the

      three is to get independent verification or an audit which would show that what Bennet/Boasberg did was legitimate and showed good financial sense at the time.  Which I believe are the kind of questions that Merida, Kaplan, and Jimenez are asking.

    • jpsandscl says:

      All the pro-reformers out there who think so highly of reform for reforms sake, can you please tell me exactly how it has benefited the students of DPS?

      If Bennet’s reforms were so stellar, why are DPS’ students still mired in mediocrity? Why id the drop-out rate still through the roof? Why do still less than 50% garduate within four years? Oh, it must be the teachers union, not the administration.

      For all the hyperbole above about trying to call out the political axes being ground against bennet, it seems the pro-Bennet faction here is drinking far too much of its own cool-aid to notice that they are just making knee-jerk responses and looking for a conspiracy when they should simply look in the mirror to find it.

      Seems anyone who criticizes Bennet at all on this blog better have thick skin because the sharpened wits on this site will come a cutting.

      Interest rate swaps, credit default swaps and any other of the myriad variety of derivatives are toxic financial products which should be highly regulated if not outlawed. It is shocking how many CEOs and CFOs of bankrupt institutions have claimed they did not understand the contracts for these products that they signed which later brought their companies to ruin. But we’ll expect a volunteer board of directors to get it.

      If DPS is invested in derivatives like these, they should be immediately divested. Public funds should not be gambled away on such risky products.

  9. Bailey says:

    Since 2001 I have been focused on DPS operations and every year, my hair has gone more grey and by now my eyebrows have raised nearly to my hairline.  

    DPS uses “special attorneys” whom it pays for outside work.  These attorneys do not apparently have to compete for this work, and seem to represent political forces that were never elected.  Some are never replaced even though the decades flow by.

    Who these attorneys actually represent is a VERY hard call.  The superintendent?  The individual Board members (you can see the problems in that)?  Administrators who’ve hurt people?  The public?  

    By collectively representing individuals along with DPS when questions like this are raised, private attorneys have skewed both the way we believe public entities operate, and the way that they are supposed to.

    It’s anybody’s Call who’s in command at DPS but if you peel off ALL of the layers, this answer will come down to an insurance company, a collection of voluntarily recognized private labor unions, and not a “public entity” at all.

    I am relieved to see that someone has finally published critical information about the DPS deal: the public is paying a fixed 6% while rates are less than 1%.  Insurance companies don’t make good financial decisions except in their own u/w interests, and everyone at DPS is immune for crappy decisions like this one.  

    Is it “Corruption” to have people hired into a public organization, whether as administrators or supervisors, when they’re really not qualified to do the job?  At some point, I think it probably is.  When Friends hire Friends because there’s no mechanism requiring anything else and the political and financial (retirement plan) boot to being there is extreme, the public is subject to corrupt HR practices and I think we are now seeing them in action: what the people in charge of DPS knew about financing issues when they signed onto this deal is less than what the dude behind the Starbucks counter already had figured out.

      • Bailey says:

        I would imagine that special counsel was hired in order to evaluate and document the refinance, wouldn’t you?

        Who was that firm? Does it represent any other entity of interest?  How much did it cost?  Did it agree to analyze the merits of the proposal from the financing end or just the documentation side?

        I don’t have the answers to any of these questions nor any reason to suspect counsel failed in any way.  However, I am fairly sure neither the Board nor Tom Boasberg sat down at their word processors one day and simply accomplished a refinance on their own.  

        If (as it seems from the press release) the Board didn’t hire this counsel with the request that it document and accomplish the refinance on X terms on behalf of DPS, then who did?

        It’s the process I am questioning, and merely pointing to this single feature as being one of interest, that’s all.  

  10. Bailey says:

    Have you ever heard of a billion dollar pension plan with no IRS qualification letter?

    Want to take a guess?

  11. dwyer says:

    Her choice for the worst item of the week was the new release by Kaplan, et.al. about DPS financing.  I presume that we now have the Denver Post take on the situation.

    I am concerned that this will be dismissed as a political ploy. Perhaps the DCTA will be able to get some kind of audit or review…even tho, I suppose they had to approve the original transaction.  

    • Bailey says:

      I don’t believe DCTA would have “had to approve the transaction” or that local school districts are subject to thorough routine outside audits.  

      Lest there be confusion about my earlier remarks: there are no “powerful groups,” but rather (serendipitously) powerful individuals, at DPS.  Some of the individuals in command have been “pro-union” while others have been “anti-union,” and just like the “pro-charter” vs “anti-charter” issues, this has caused the Powers That Be to ebb and flow….resulting in inertia.  Meanwhile, most DPS acts are made by agents whose names and positions we do not know or control through civil service or in any other manner.

      Because school districts are locally-controlled entities under the state constitution, placing regulation into effect has been challenging. Thus far DPS has been willing to litigate at public expense many legislative attempts made to impose regulation upon it, and other affirmative acts are accomplished by inaction to avoid triggering controls.

      In this case, it sounds as though a couple of Board members who signed off on a major transaction did not understand what they were getting into, and one cannot help but wonder whether this is the inevitable manifestation of having to rely, for information and cooperation, on totally unregulated individuals who have their own fish to fry. These individuals are supposed to serve the “Board,” but have been encouraged by “DPS politics” to have a position on one side or the other that favors either the ever-shifting majority, or the resulting minority.

      It also sounds as though the Superintendent was given a contract with the last Board whereby individual Board members are without authority to question his operational decisions….or something. He certainly sounded offended at the notion that members were “disgruntled” as opposed to being concerned that they were “dissatisfied.”

      If this is “a political ploy” then it’s one that needs to come up, for all the usual political reasons: If it turns out that DPS made a bone-headed decision at the time, given all the competing factors (objectively viewed), then what could be more germane to a vote on the political future of the guy in charge at that time?  Whoever he or she is?

      Maybe the decision will be shown to have been made after a conscientious analysis of the alternatives — in which event that would be equally newsworthy.  

      • MADCO says:

        1) http://2009denverplan.dpsk12.o

        2) https://denvergov.org/Portals/

        3)

        http://static.dpsk12.org/gems/

        I can’t recall if DPS merged the peniosn system with PERA- I’m sure PERA has requirements for periodic audits.

        Likewise, I didn’t look at CDE, but I am confident they have the authority to audit- not sure f they did.

        Likewise, Dept of Ed.

        Maybe the decision will be shown to have been made after a conscientious analysis of the alternatives — in which event that would be equally newsworthy.  

        I hope so.

        I still can’t help wonder about the timing- happenstance? best suited to get accurate answer? or best suited to inject confusion and doubt into some other campaign?

        • dwyer says:

          The NYT article is evidently what prompted the concern, or was used to piggyback on the SEIU newsletter.  Kaplan, et.al. couldn’t have just created their concern out of thin air.  They cite the NYT article and SEIU.  Colorado is the only state with a contested democratic senatorial campaign which is having caucuses on Tuesday.  It is crazy to think that the concern from Kaplan, et.al. is somehow orchestrated.  If anything, Kaplan and Jimenez may have been doing CYA. Merida is the only board member who has opposed Boasberg who was not on the board when this decision was made.  Let us not do another “pileon.”

          Boasberg did make a crazy comment during the “counseling session”  with the marriage counselor last December….something to the effect that he would make the decisions and if the board didn’t like that, they could fire him.  Kaplan tried to correct him and explain the role of an elected board in making policy.  

          Boasberg is acting like he has something to protect.  I reiterate his behavior and attitude is inappropriate in a hired public employee who is subordinate to an elected board, by statute.  

          • MADCO says:

            The NYT article has nothing to do with DPS.

            Except that someone else some other time used a similar (and pretty common)  transaction.

            I agree- Superintendent should work for the Board. I also agree – if they don’t like the way he’s performing, they should fire him.

            I meant the timing of the “release”.  I agree that the DPS board has a fiduciary responsibility. And they should understand this transaction and any obligation and commitment of the DPS.  If they do not, they should be fired.  

            • dwyer says:

              THe NTY article pointed out the pitfalls of this common transaction for local government units. This is what the three were addressing.

              The Board of Education cannot be fired, they are elected and so would have to be recalled….an almost impossible feat.  It also would, IMHO, be very destructive to the ongoing education of the kids.

              The Superintendent evidently enjoys the support of four of the seven members of the Board of Education.  They are the majority, so it is unlikely that they would vote to fire Boasberg.  The three members of the Board who are asking for more information are the three which  Boasberg characterized as “disgruntled” for asking.  I believe that showing that kind of contempt for duly elected officials  to whom Boasberg is supposed to be subordinate is outrageous and destructive of the accountability system in place.  

              However, what can be done?  As long as a majority of the BOE allow Boasberg to attack the minority on the Board, his behavior is condoned.  The minority members are all evidently Romanoff supporters.  Are the democratic members  of the majority on the Board, Bennet supporters?  I don’t know.

              Is this a mess? Yes.

              • MADCO says:

                Two of whom voted to approve this transaction at the time.

                I’m not close to the situation- but if Boasberg’s comments in the Post aer what you are going by- I didn’t see contempt.  I’m not sure he’s not taking them seriously- if he’s not that is a problem and th eBoard should fix it.

                And if the three were serious about fixing that kind of problem, this is a poor way of focusing on it.

  12. skeptic1 says:

    I’m a little skeptical about the motivation behind this.  How convenient is it that the release came out close to a week before the caucus?  Beware of the motivation.  Yes, transparency is necessary but this is not about transparency.  This is pure gamesmenship.  Don’t be fooled.  

    Since when did we elect Erin Brokovich and not the DPS school board?  

    • Bailey says:

      “…if it’s not one thing, it’s another,” as Roseanne Roseannadanna would have said. 🙂

      I’d agree that the timing looks “fishy” except that it seems to always be time for a caucus or a rally or an election itself.

      I’m not at all aware of Who supports Whom so for all I know, you are 100% right and bringing the issue up was “politically motivated” — but when would have been any better time to raise it, if it wasn’t? Isn’t it “always something?” (Especially here?) It sure seems that way to me but maybe it’s just Getting Old.  

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