Forum Post: Americans Pay WallStreet $20 BILLION for Merrill Lynch & Co. Plan Gone BAD to use Interest-Rate Swaps to Finance NewOrleans Stadium’s Renovation After Hurricane Katrina
Posted 5 years ago on Jan. 15, 2012, 8:22 a.m. EST by MonetizingDiscontent
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Americans continue to pay for Bad LasVegas Style Bets, By Insolvent Banks.
Americans Pay Wall St. $20B for Bad Swaps
-Jan 13, 2012-
Seven months after Hurricane Katrina ripped holes in the Superdome’s roof in 2005, Louisiana State Bond Commission members made what they were told would be “the best of a bad situation” in financing the stadium’s renovation.
Acting against the recommendation of their staff, the commissioners voted for a Merrill Lynch & Co. plan to use debt and interest-rate swaps to pay for the job. While the deal helped keep the National Football League’s New Orleans Saints from leaving town -- and the arena got new scoreboards while 12,000 seats were converted to luxury class -- taxpayers became the losers for supporting a winning team.
The cost of financing the work has reached $42 million, almost a quarter of the $187 million spent on Katrina-related repairs and enhancements and three times as much as expected. The deal became so expensive that the state repurchased the debt sold by the New York investment bank to stop the bleeding.
“It was a flawed idea out of the gate,” said Robert Brooks, who teaches financial management at the University of Alabama in Tuscaloosa.
Scores of public officials, including Michael Bennet, now a U.S. senator from Colorado, and Jon Corzine, the former governor of New Jersey, bought the same Wall Street pitch: So-called auction-rate bonds would lower financing costs by allowing them to pay short-term rates, and interest-rate swaps would protect them if markets moved in the wrong direction.
Corzine.... ( http://occupywallst.org/forum/waiting-for-the-perp-walk-if-stealing-12-billion-f/ ) ....didn’t respond to a request for comment. A spokesman for Bennet, Adam Bozzi, defended the move made when the senator was superintendent of the Denver public schools, saying that the financing put the district “in much better financial shape.”
Brooks said that it was “no surprise that the leaders went for something with that level of complexity. An auction-rate security with a swap is much more exciting for the officials, but it’s terribly expensive for taxpayers.”
Government overseers often didn’t understand that the market was controlled by the banks that sold the derivatives they claimed would minimize risk, and that could impose penalties when deals unraveled.
From Portland to Puerto Rico, officials gambled with sewer, road, school, pension and stadium financing. Municipal securities made up about half of the $330 billion auction-rate market when it collapsed in February 2008, data compiled by Bloomberg show. Taxpayers have forked over $20 billion in fees for swap agreements in the past five years, according to Andrew Kalotay, chief executive officer of the debt-management firm Andrew Kalotay Associates Inc. in New York.
Public officials, Kalotay said, “think they know what they’re doing, and they screw up.” Few have acknowledged their mistakes. “No one wants to say out loud they’re unsophisticated,” said Marcus Stanley, policy director of the Washington-based nonprofit Americans For Financial Reform, a coalition of unions and civil rights and consumer advocates.
“In most cases, the elected political leadership are part- time amateurs,” said Roger Noll, professor emeritus of economics at Stanford University near Palo Alto, California. “They get a noisy political grassroots movement that wants to subsidize a team, and then they get sold a bill of goods.”
In Louisiana, Treasurer John Neely Kennedy, who serves as bond commission chairman, warned before the Merrill Lynch plan passed in March 2006 that the swaps could backfire. There was so much pressure to overhaul the 37-year-old stadium for the Saints that he said he felt as if he had “a gun to my head.”
The NFL franchise did stay put in the arena, known since October as the Mercedes-Benz Superdome. Not only that, the Saints acquired quarterback Drew Brees, won the Super Bowl in 2010 and will play the San Francisco 49ers in the second round of this year’s playoffs on Jan. 14.
Still, the costs to the state are “outrageously high,” Brooks said. That the auction-rate deal was done in part to satisfy team owner Tom Benson made it all the more imprudent, said Robert Baade, a professor at Lake Forest College near Chicago and co-author of a 2006 study that found subsidizing the Saints after Katrina wouldn’t make economic sense.
The Bayou State’s costs spiraled out of control after banks, reeling from the credit crisis, stopped acting as buyers of last resort at auctions of floating-rate securities.
Rates on the debt surged, going as high as 20 percent. The swaps didn’t cover the difference. Investors shunned the market. “If the banks were cardiologists, they would have been sued and thrown in jail years ago for what they have done,” Brooks said.
‘Ignorance No Excuse’
The Louisiana Stadium and Exposition District did sue, claiming bond-insurer Financial Guaranty Insurance Co., a unit of New York-based FGIC Corp., sold the agency protection that became worthless and that Merrill Lynch fraudulently failed to tell officials everything they needed to know.
Charles “Buddy” Roemer, Louisiana governor from 1988 to 1992, said he doesn’t buy the contention that Tim Coulon, who was the head of the stadium agency at the time of the deal and urged the bond commission to approve it, and the commissioners didn’t have enough information. “I don’t think ignorance is a good excuse here,” Roemer said. “I don’t think unsophistication is a good excuse. All these entities pay large sums for legal and financial advice.”
In May 2010, U.S. District Judge Loretta Preska dismissed the claims against FGIC. The state has appealed. Officials with FGIC didn’t respond to telephone calls seeking comment......