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August 06, 2010 10:51 PM UTC

Money Train: Point Counterpoint on the DPS Swaps

  • 48 Comments
  • by: Raf

( – promoted by Colorado Pols)

I’ll readily stipulate that this is a big story.

That said, I don’t know that it’s the nuclear bomb that everyone thinks it is. After reading the story, and reading some earlier stories written before DPS engaged in this latest round of funding, I’m more convinced than ever before that this is a re-litigation of a story that we’ve already seen on this site.

What’s more, as a journalism student and communications professional, it seems to me that if your main source – Jeanne Kaplan – happens to be a supporter and a max contributor to the man running against the subject of your story, you may want to disclose that. I mean, that’s just a small conflict of interest. It took me five seconds on OpenSecrets to find out Kaplan’s donated $4,800 to Romanoff. Seems Gretchen could’ve included, somewhere in the story:

“Kaplan, who in addition to serving on the board is a major supporter of Mr Bennet’s opponent, Andrew Romanoff, feels that greater transparency was necessary.”

That, however, would’ve ruined the portrayal of Kaplan as a selfless steward of the school coffers. But more on her anon.

Without straining everyone’s patience beyond where it lies, here are the points that seemed salient to me.  

The funding instrument was strange or unique, even exotic.



I find this hard to swallow. DPS first did a Pension Certificates of Participation (PCOPs) issuance in 1997. What’s more, eight years later, DPS did a variable rate issuance with a swap – precisely the same transaction that everyone is now claiming was a massive conspiracy.

It’s an odd conspiracy that sees Bennet and Boasberg somehow con the school board even before they arrive!

Why didn’t DPS go with a “plain-vanilla” bond?



Because there’s no such option. Regardless of how you handled the pension debt – whether on a fixed-rate or variable rate – it would’ve still take the form of a pension certificate of participation (PCOP). In 1997, it was a fixed rate PCOP. In 2005 and again three years later, it was a variable-rate PCOP. And in those two occasions, the interest rate hedge that was used in the PCOPs was a derivative – something that’s very common and has now been around for nearly 35 years in the financial sector.

You know where I first learned about derivatives? Believe it or not, Michael Lewis’ Liar’s Poker, first published 20 years ago. It’s a pretty easy read. Jeanne Kaplan should think about reading it sometime.

Wait, Kaplan? She seems like a pretty stand-up person. All she wants to know is where the money’s going, and where it’s been.



Which are great questions to ask! Except that, incredibly, she’s never asked them until after she voted to approve the PCOPs – twice! What’s more, here’s her explanation for why she’s so flummoxed (courtesy Susan Greene, at Denver’s paper of record):

“The resolution was 13 pages, and it has I don’t know how many ‘whereases’ all through it. It’s very complicated stuff,” says Kaplan, revealing her ineptitude both with finance and basic reading.”

“I’m not sure any of us really knew what we were voting on,” Kaplan says. “It’s one of those things. You say the word ‘derivative swaps.’ And come on now, how many people really understand that?

“I admit that I probably didn’t have as much information as I should have,” she says. “That could well be my responsibility.”

facepalm Really? You don’t say? I mean, you couldn’t abstain from voting until you’d done more research? And not only did you vote once to approve the deal, you voted twice without knowing what the hell you were voting for? And she’s the person who won the election?

Wait…she was re-elected? Amazing. Ladies and gentlemen, Jeanne Kaplan: Denver’s own version of Sarah Palin. Just as ignorant, just as dangerous.

And as for how many people understand “derivative swaps”, here’s Wikipedia, with the first result in the magic Google box:

A derivative is a financial instrument – or more simply, an agreement between two people or two parties – that has a value determined by the price of something else (called the underlying).[1] It is a financial contract with a value linked to the expected future price movements of the asset it is linked to – such as a share or a currency. There are many kinds of derivatives, with the most notable being swaps, futures, and options. However, since a derivative can be placed on any sort of security, the scope of all derivatives possible is nearly endless. Thus, the real definition of a derivative is an agreement between two parties that is contingent on a future outcome of the underlying.

I mean, it’s Wikipedia, I know, but still. You mean to tell me that Kaplan, as an elected official with a fiduciary responsibility couldn’t take seven seconds to type in “derivative swaps”? And this is someone in charge of money?

Man, I’m hoping someone’s checking Jeanne Kaplan’s email to make sure she’s not replying to various Nigerian government officials. Can someone check on that, please?

If anything, the combination of her rank incompetence along with her clear conflict of interest is the story here. She’s clearly shown that she’s unfit to be anywhere near a tip jar, let alone a school budget. Between failing to do due diligence, voting twice to approve a deal she didn’t bother taking the time to understand, and then engaging in a political witch-hunt to somehow evade responsibility, Jeanne Kaplan is sure covering herself in glory here.

Wait, there’s more – it turns out that she’s contributed the maximum amount to one of the candidates in the primary: $4,800 to Andrew Romanoff. So, it stands to reason that she might have just the slightest, tiniest, interest in making Bennet look as bad as possible. Just a hunch, there.

Look, this isn’t to say that Bennet and Boasberg don’t deserve scrutiny for their actions. They do – and G-d only knows, there’s been enough of it over the last two years.

The fact of the matter is, though, the whole point of having a school board is for them to exercise oversight over the district administration. And it’s clear, just from a top level glance, that Jeanne Kaplan has been grossly negligent in doing just that, without even getting into the fact that she’s a major supporter of the man running against Bennet. Relying on her as an impartial source for this story is like relying on FOX for a fair and balanced take on Democrats. You’re going to get a take, it’s just not going to be fair and balanced.

OK, OK, I get it. So, what about these termination fees?



They don’t actually exist. What we’re talking about here is what’s referred to as a make-whole provision. In a PCOPs, the only party that’s allowed to end the transaction is DPS – period. The derivative swap is based on publicly quoted Bloomberg rates (Bloomberg is the gold standard of public reporting on markets in the U.S. – that’s how Mike Bloomberg made his billions, by selling the terminals with the rate information. They’re butt-ugly things, orange type on black screens)

How it works is like this: if interest rates go down, and DPS wants to end the PCOPs, then DPS has to pay the banks a make-whole fee, which is also called a termination fee. So, yeah, not an optimal result.

However, if interest rates go up, and DPS wants to end the PCOPs, then it’s the banks that have to pay the make-whole fee.

Either way, the make-whole fee is the same in either direction. And regardless, like I said, the decision lies with the district, not the banks.

Fine, I got you. What do you man by “interest rates”, though? Is it like the ones I pay at KeyBank?

No. The way the deal worked was that DPS entered into what’s called an interest rate swap. In an interest rate swap, each counterparty agrees to pay either a fixed or floating rate denominated in a particular currency to the other counterparty.

The most common interest rate swap is one where counterparty A pays a fixed rate (the swap rate) to counterparty B, while receiving a floating rate (usually pegged to a reference rate such as LIBOR).

LIBOR, by the way, is London Inter-Bank Offered Rate. It’s what’s known as a reference rate, people use it all the time, and it’s based off what banks in London offer to each other.

The deal that Bennet & Boasberg sponsored is what I described above. DPS pays out a fixed rate, and receives a floating rate from the banks in return. In this PCOPs, the fixed amount plus fees adds up to a rate of around 6%. Currently, it stands at 6.1% – which is less than the 7.25% that a fixed-rate PCOPs would’ve cost. Certainly, it’s not the massive, onerous burden that Morgenstern makes it out to be.

Look, it’s a Friday afternoon. We’ve seen this story hashed and re-hashed and re-hashed again. There’s nothing new to see here. But I’ll close with one last point:

Haven’t fewer teachers been hired this year?



Good lord. head-desk

All school districts in this state are facing massive, draconian budget cuts. All around Colorado, you have furlough days and teachers being laid off. And we’re hiring teachers.

Sure, it may not be as many as in previous years, but chew on that again:

DPS is hiring teachers.



If things are as dire and apocalyptic as Kaplan thinks they are, then how in the hell is DPS flush enough to hire teachers?

The answer is that while things are bad, they’re never as bad as they may seem. And that it would seem that contrary to money being wasted away, it looks as if money was prudently managed.

Like I said, it’s Friday. I’m going out for a walk. It’s too beautiful for me to engage in more keyboard smashing.

Comments

48 thoughts on “Money Train: Point Counterpoint on the DPS Swaps

  1. needs to seriously consider whether staying in the race jeopardizes the Democrats chance of holding a US Senate Seat.

    This is a scandal that Republicans will take full of advantage, should he make it out the primary.

    1. hold on this seat with his nasty untruthful campaign. If Romanoff truely cared about keeping this seat Democratic, he would have never entered this campaign when he did and the way he did.

      This has been sour grapes from the beginning, you didn’t pick me so I’ll throw a fit. On top of that he has chosen to run as a fake progressive, hoping people will ignore his DLC conservadem past.

      The one question that I ask you that you can never answer: If Romanoff is so progressive, why haven’t any progressive groups like DFA, Move on, Progressive Dems endorsed him the way they did Sestek and Halter? Probably because they know a phony when they see one.

      Bennet is by far the better candidate.  

      1. We live in a democracy. No one anointed Senator. No sour grapes on Romanoff’s part. A person has to earn that position with the vote of the people. Romanoff is the far better candidate.

        1. appointed by Colorado State law by the governor to fill a vacant seat in the senate. It is up to the sitting governor to select that person.

          Would you have said the same thing if Romanoff had been appointed? He wouldn’t have been voted by the people either. So yeah, it is sour grapes, from Romanoff and many of his supporters.

          Instead of appointed they use the word anointed – like you did. Would Romanoff have been anointed if he had been picked?

          Bennet is by far the better candidate.  

        2. Which we’re having right now.

          So if Bennet wins on Tuesday, having won a vote of the people, he can count on your support, yes?

          Would you like 1 yard sign or 2?

            1. And I don’t need to pick up any more.

              a) I don’t do yard signs part;y ’cause the don’t vote and mostly for the same reason I post with a blogonym

              b) Maybe, the best wannabe Senator money can’t buy.  Except if he wins Tuesday, he’s going to need big money to be competitive.  DSCC will just be the start.  In 2008 Udall spent $15million – he had no primary, huge turnout, Obama coattails, Bush fatigue and still only won by a few points.  2010 – no more Bush fatigue, no Obama coattails and diminished Obama popularity, turnout will be much less, and we’re having a fairly mean spirited and divisive primary.

              Where’s he gonna get the $15 million?

              I know, he doesn’t need it. He has you and the hundreds of other D activists. And the festivus bus. And the unicorns.  

  2. Thanks for a great post Raf.

    Unremarked in all of this is the whole reason Bennet et al went down this road was the underlying failure of previous supers and boards to fully fund the pension. Their justification for doing so in part was the hope that pension assets would continue to appreciate. That hope is the mentality deplored by the haters elsewhere as playing in the Wall Street casino.

    The transaction referenced in the NYT was an attempt to solve this pension funding problem that Bennet inheirited. He solved the problem, and in the face of horrible financial carnage around us the district ended up no worse off then before. Which is a hell of an achievement.

    The article stupidly points to bankers earning fees for the transaction in excess of a strawman simple transaction. Is there something wrong with that? Seriously? Isn’t the issue for the district the total expense, period, not the elements of the expense? Money is money. (Echoes of DSCC/PAC here.)

    This fake drama is one more example of how DPS is run for the benefit of the teachers first, and one more example of why I would never send my kids to DPS.

    I’m not a registered D but I am going to go help mom hit the phones this weekend. This has gotten seriously stupid.  

  3. As an FYI – Tom Boasberg, who helped Bennet orchestrate the deal and who has been withholding information about the deal to help Bennet, is a big campaign contributor to Bennet. Additionally, Level 3 Communications, where Boasberg formerly worked, is a huge contributor to Bennet’s campaign.

    I just put that out there for those who are desperate to take attention off the New York Times report from a Pulitzer Prize winning business journalist.

      1. I don’t have a dog in the race. I am interested in the truth coming out, as a voter, as a taxpayer and as a soon-to-be father of a DPS student. I realize that is difficult for mindless partisans and candidate cultists to realize. Indeed, that inability to understand that is what is destroying actual journalism.

        People like you who treat politics as a sport – as if the only value of a campaign is the horserace rather than the substance of the issues – are what is destroying our country. You are probably proud of that, but I think it’s rather sad.

        1. assume so much. I take politics very seriously and for you to say you don’t have a dog in this race is at best dishonest.

          Since you don’t seem able to discuss this in a civil manner, I have looked at the substance of the issues and find you less than honest with the way you present things on your show – perhaps that is also what is destroying actual journalism.

          Yeah I’ve heard your crap, the healthcare bill wasn’t perfect enough for you, the financial regulatory bill wasn’t good enough for you, Obama doesn’t lean left enough for you. Everyone should be the perfect David Sirota progressive.

          No we shouldn’t cave in to our values,but you don’t just toss everything in the name of purity. So yeah go ahead insult away, still doesn’t make you right.

        2. David – could you be more full of shit? Every diary you have written was a pro-Romanoff at best or anti-Bennet at worst. You are the perfect example of the Democratic version of the Tea Party. If someone doesn’t measure up to your purity test you use your radio show to tear them down.

          You couldn’t give a shit about the truth coming out. All you care about is promoting your show. You’ve NEVER posted a single diary that wasn’t free advertising for the next day’s show. You’re a hack who has the nerve to lecture about “actual journalism”? When you start posting on this site about issues unrelated to your dog and pony show, I’ll take anything you say as something more than free advertising.

        3. You’re the last person in the world who should use the word “truth” in a subject line.

          Try “Shameless self-promotion” and maybe you’d have a prayer of half of us buying it.

        4. I haven’t heard anything on your show for months that wasn’t pro-Romanoff and anti-Bennet.  Most mornings, I have to turn you off after a few minutes.  I miss having a morning show I like to listen to.  I’m sorry to hear you plan on staying in Denver.  I was hoping you’d be moving on soon.  Please don’t call yourself a journalist.  Just call yourself what you are: a talker giving free daily advertising to one side in a Democratic primary.  

          1. I truly want to know. I think you like hearing what you want to hear. Sticking your head in the sand is not going to solve our problems and as a country we face many.

                    1. relating to anything of substance, I can give you a Bennet yard sign. They are BLUE and have a great picture of the rockies in the background. They look really great on all the yards in my area.

    1. whose job does not allow him to comment publicly (I copied it verbatim):

      “This (Morgensen article) is unbelievable.  She never thoroughly researched the details of the deal to secure DPS debt.  She just made assumptions about the deals that were done.  One of the assumptions is comparing the DPS deal to a variable rate homeowner mortgage.  She also made assumptions on termination fees.  She should have known all of this being a financial reporter.  Any individual who works with these fixed income investments and derivatives would know that the Morgensen article contained significant inaccuracies.”

  4. First he negotiates this deal that is very favorable to the banks no matter the loser.  Then he is given lots of money in campaign contributions by these very bankers that benefited so richly from these derivative deals and then Bennet votes in favor of the banks not once, not twice but three times.  

    What’s a person suppose to think that none of this is connected and Bennet just does this because it’s good policy?  

    And what did he mean about “unintended consequences”.

    1. The very same oxygen breathed by banks.

      Then the bankers donate to his campaign. MOre oxygen is exchanged. Then Bennet makes some votes more complicated than SH implies.  More oxygen.

      Conclusion – Bennet is in O2 with the bankers.  

    2. substance behind those votes? Have you listened to Bennet explain why he felt he needed to vote the way he did? Can you explain why other Democrats voted the same way? Are all Democrats but Romanoff corrupt?

      You do understand that the Senate is far more complicated than voting for bills depending on what the titles are don’t you?

      House Resolution 1801542 could be named “Fluffly Bunny Bill” and be all about slaughtering thousands of rabbits for their meat to help combat the many dangers presented by cattle.

      Do you vote to save the rabbits or fight global warming? The point is not all votes are simple decisions.

      Quit freaking out about fucking sign colors, it makes you look completely unhinged. Try to understand that life and politics are a bit deeper than you are.

      1. The cram-down vote was simple.

        The Brown/Kaufman vote was simple.

        Bennet’s votes were in favor of the banks.

        What more do I need to know?

        His votes, the configuration of his campaign war chest and his past history as a corporate raider are all I need to know about this appointed-never-been-elected senator.  And then he shows up with signs, banners, hats and t-shirts that were Republican red at the State Assembly. It’s almost like he has no clue what he is revealing but reveals it never-the-less.  

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