University of California at Berkeley

A new internal report from the University of California shows that UC, like many public entities (cities, counties, museums, etc) engaged in risky, complicated credit swaps with Wall Street Banks:

Over the last decade, the UC Board of Regents has engaged in risky deals with Wall Street banks called interest rate swaps. Banks sold swaps to the university and other public institutions as insurance against rising interest rates on variable rate bonds. Under a swap agreement, borrowers such as the university paid a fixed rate to the bank in exchange for the bank paying the university a variable rate based on the markets’ interest rates for borrowing.

Now these swaps have turned out to be losing bets. UC is taking huge losses because interest rates plummeted following the financial crisis of 2008 – allegedly in part because of illegal manipulation by the same banks that sold the swaps – and have stayed at record lows. Swap deals already have cost UC nearly $57 million, with $200 million more in losses anticipated. Of the $250 million UC expects to receive from Prop. 30, some $10 million a year will go to swaps payments unless the deals are ended.

OK, but nothing new here, right?  Just that great sucking sound all over America.  But this one has a neat wrinkle:

These swap deals are part of a dramatic change in UC’s relationship with Wall Street. In 1990, none of UC’s top management or regents had direct ties to the major Wall Street banks. Today, those banks have a growing foothold among top UC management with direct oversight over UC’s finances.

For instance, the chief financial officer, Peter Taylor, came to UC from Lehman Bros., where he was managing director for public finance until Lehman collapsed in the largest bankruptcy in American history. While Taylor was at Lehman, the company was hired to help expand UC’s debt load. Lehman ultimately was party to one of UC’s interest rate swaps – a bad deal that has already cost the university more than $23 million.

Great hire UC.  Combining public underfunding of education with complicated wall street horsecrap.  Surely this must be going on more boards of directors and financial offices all over the country – it’s not just financial trustees being bamboozled by Wall Street, it’s basically internal plants making the deals (I wouldn’t be surprised if this is part of a new revolving door situation: go forth and screw over public institutions and then come back for your big Wall St payday).

Photo: gku on Wikimedia Commons