12 replies to this topic

[greenie]

http://www.bloomberg...6...&refer=home

Deutsche Bank Swap Makes Pennsylvania Taxpayers Lose (Update1)

By Martin Z. Braun

Jan. 17 (Bloomberg) -- The third-poorest city in Pennsylvania is a lot poorer because of a 28-year bet on interest rates that already has gone awry.

The Reading, Pennsylvania, school district, which has 18,323 students, this week must pay $230,000 to Deutsche Bank AG, Germany's largest bank, because it's on the losing side of a wager that long-term interest rates will rise faster than short- term interest rates. In April, the board rushed approval of the so-called interest rate swap in eight days after its adviser said the transaction may earn the district $16 million by 2034.

While Reading's taxpayers are liable for the loss, bankers and advisers already have pocketed $1 million in fees for arranging the swap, enough to buy 11 Mercedes-Benz S-550 sedans. This week's payment to Deutsche Bank would have covered the school district's monthly utility bill.

``It was all done in a real hurry,'' said Keith Stamm, the only member of the board to vote against the deal. ``The whole board is so desperate to try to find a way to raise money, they see this floated in front of them as a big-time amount of money and they want to go forward with it.''

Local governments from Augusta, Georgia, to Oakland, California, are being lured by similar opportunities to speculate with derivatives created by the world's biggest banks. Most of the $400 billion of private agreements sold to municipalities escape taxpayers' notice and are little understood by the public officials and administrators who approve them.

[Sentient Being]

http://www.bloomberg...6...&refer=home

I wonder if all the school board members are a product of that school? Time to upgrade the curriculum I think. Adults should know better than to take on high risk in pursuit of easy money. The old saying: "if it's too good to be true" would have done these folks a world of good had they learned that lesson early in life.

[dcengr]

The cost of education is going up? Forget about $20 hammers.. $20 rulers.

[dasein]

Do any of you remember Orange County? Merrill settled, but with the OC precedent Reading may have a problem doing so. OTOH, there are SEC rules as to "qualified" investors, I wonder if they might have this leg to stand on, since clearly they were in no way qualified to make any such investment decision. As to being a product of the school system - there should be no reason why people with expertise in a non-financial field should need the kind of elaborate expertise in finance as is required to understand the risk profile and stress characteristics of derivatives, this is pretty sophisticated, so much so that a lot of IBs continue to lose on their bets, despite crews of PhD quants, so I think that is besides the point. What I see as one point, however, is how normal returns have shrunk, so that any level of attractive return is achieved with heightened levels of risk, be it leverage (private equity, LBOs and highly geared corporations, as well as all manner of derivatives), startups (hi risk on unproven track records) or hi-yield ( defined as less creditworthy institutions). This is a dilemma for everyone who needs income, be it the retiree or the average community or Joe. One of the best things to invest in is infrastructure, yet we have taken all infrastructure bets withe dependable future revenues private - water, transit, electric, because the government "shouldnt be in it." Instead, the government is the bailout of last resort for every type of infrastructure investment gone awry. But the desparation in so many communities, and in the entire country I think in not so distant future, to just get the basics paid for (and not raise taxes) is something to ponder. It is a long way from the America of the 50s and 60s. klh

[da_cheif]

another investment by a public servant turning sour...lmazof

http://www.freep.com...EWS06/701180305

[ty250]

I live near Reading, and I know Keith Stamm. This is amazing! It appears Keith was the only responsible member. I can hardly wait to see him.

[Sentient Being]

dasein,

My point was not that the school system should have given them deep financial expertise to understand complicated financial instruments. But that the school should have given them enough basic understanding or "common sense" to grasp of the concept of no such thing as "easy money" and that large gains might turn into large losses if the market moves against them. These folks were gambling with the tax payers money, with their children's future, and they didn't even have the intelligence to realize they were gambling or to go get some qualified outside advice before voting this through.

They probably let these guys come in and talk over their heads then agreed with it rather than risk appearing stupid for saying the didn't understand what this was about or what risks they were taking on and refusing to agree to it until they did understand. Even if they had simply had the brains to NOT VOTE FOR something they could not understand they would have avoided disaster.

[arbman]

another investment by a public servant turning sour...lmazof

WHY?!? What's it to laugh so much? perhaps if you can explain we can all laugh together...

[jawndissedi]

http://www.bloomberg...6...&refer=home

So kewl! A million dollar rip -- up front -- from the bagholders!! Man, these guys are good [strike that] -- these guys are the best. Makes you proud to be a capitalist, doesn't it?

BTW, if the cash payments are too onerous, the rubes can always offer to send Deutsche Bank some kids. You know, to serve as au pairs and pool boys and the like. Learning to detail a master-of-the-universe's Lamborghini is likely to be more useful to them in the long run than anything they learn in that hick school district.

[briarberry]

weekend watching, for anyone who doesn't know anything about the LTCM crisis this is a good introduction

60 minutes documentary (I think it's the PBS one) - discovery of the Black-Scholes formula, pricing options, dynamic hedging, LTCM crisis


Trillion Dollar Bet


http://en.wikipedia....i/Black-Scholes

http://en.wikipedia....ital_Management