Whitefish Bay School District was discussed here a few days ago (in OPM-Bagholder Land) referencing a NY Times article, From Midwest to M.T.A., Pain From Global Gamble. Here’s more, courtesy of Richard’s Real Estate and Urban Economics Blog.
When School Districts Become Financial Intermediaries
Bad stuff happens. I was listening to a remarkable NPR Story this morning about the Whitefish Bay School District.
The school district borrowed $165 million to purchase Collateralized Debt Obligations. Now that the CDOs are failing, the district may have trouble paying its loan back. So the bank holding the loan will have its capital position erode…etc.
This sort of thing happened to Orange County in the early 1990s. It sure would be nice if we didn’t have to learn the same lessons over and over again.
NPR Story: Wis. Schools’ Money Tied To At-Risk German Bank
Excerpt:
As the global economic crisis unfolds, a group of school districts in Wisconsin has found itself at one end of a chain of exotic and risky financial products. At the other end is a troubled German bank — and smack in the middle is the school districts’ $200 million investment.
When school officials plunked down the money, they believed the investments were as safe as a corporate bond, David Kestenbaum and Adam Davidson of NPR’s global economics unit, Planet Money, tell host Steve Inskeep. But now they’re waiting to see how — or if — their investment weathers the financial crunch.
The districts’ finances — and their teachers’ retirement plans — are entwined with the fate of German bank Hypo Real Estate, which in turn impacts municipalities from California to New York.
Shawn Yde, a finance official for the Whitefish Bay School District, said that when he realized the extent of the risk, "My heart just sunk. I mean, it’s one of those times where you just absolutely got sick. How did we get here? We don’t invest in these things."
In reality, they bought what financial professionals call "toxic waste," a complex financial instrument known as a synthetic collateralized debt obligation.
The schools put in $35 million — and borrowed $165 million more — for an enterprise that could be compared to selling insurance to homeowners along the coast, Kestenbaum says.
In most years, the arrangement would likely yield a profit. "But right now, we have a financial hurricane bearing down," Kestenbaum said.
In this case, the CDOs were used to insure corporate bonds — leaving those who invested in them vulnerable to steep losses if the corporations don’t cover their debts.
School officials have filed a lawsuit, saying they were misled by the brokers who sold them the financial instruments…
