blueprint for a blantent scam

[Position Limit]

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ay5LDbjbjy6c

great read if you have the time. i'd like to say the state representatives were duped also, but as per usual, they were on the take. i'd also place some blame on the school board, but there doesnt seem to be an honest public financial advisory firm anywhere in the state. lesson to be learned here, always obey the most important rule of trading. dont get involved in something you dont fully understand.

"Other Pennsylvania school districts are paying banks excessive fees. Bethlehem, 50 miles north of Philadelphia, is also a former steel-making center. With a population of 72,000, the city has maintained its historic buildings.

The Central Moravian Church is a symbol of the group that founded the city on Christmas Eve in 1741. In the industrial area of the city, Las Vegas Sands Corp. is converting an old steel mill into a casino."

if all else fails, build a casino!!! pride and heritage be damned! is this a great country or what?

[Chuck Bao]

On one hand, I can see that there could be a fairly convincing argument for a municipal body to lock in interest rates on future debt issues, especially with widely-held expecations (at that time) of rising interest rates.

And, I can see the arguments for legislature that gives municipal authorities the option to manage their interest rate risks through derivative products.

So, interest rates went down and not up, and the school system ended up spending $2.8mn to get out of the contract. I do hope that this made sense over the short-term and was more than offset by lower interest expenses. If not, and interest rates reversed again, the school system was doubly screwed.

You are right, PL, nobody should be using derivatives if they don't understand them.

The children's milk money was taken away by incompetence.

But, what surprised me is the lack of transparency in these deals, the fact that they aren't regulated by the SEC AND most importantly the HUGE fees paid to the arranging banks.

Maybe somebody actually did steal these children's milk money.

I agree - scam!

[Position Limit]

"And, I can see the arguments for legislature that gives municipal authorities the option to manage their interest rate risks through derivative products."

i agree also. but is kind of ironic i guess that the lobbyist were arguing this as a means to save taxpayer dollars. so much for that. huh? i know it's hindsight now, but if legislation was passed to allow this why no need to insure against directional bets in the derivatives market? gotta hand it to jp morgan. that's what i call making money the old fashioned way.

[Vaevictis]

i'd also place some blame on the school board, but there doesnt seem to be an honest public financial advisory firm anywhere in the state.

The school districts should have known better. You should be extremely distrustful of an "advisor" who makes a commission when you buy something. The conflict of interest is obvious.


lesson to be learned here, always obey the most important rule of trading. dont get involved in something you dont fully understand.

No kidding. The worst part about this is the fact that, based on what I'm reading, if they had hired someone with the appropriate knowledge, they could have unwound the offering and found out exactly what the damned fees were. It's not like LIBOR rates, futures and options aren't publicly published and traded.

Yes, the banks took advantage of them. But, frankly, the schools failed utterly in their responsibility to perform a due diligence investigation.

[Vaevictis]

But, what surprised me is the lack of transparency in these deals, the fact that they aren't regulated by the SEC AND most importantly the HUGE fees paid to the arranging banks.

Thing is, I don't see why they would need to be regulated by the SEC.

Pricing of these securities is well understood, and is easy to determine. It's not like a company stock where the company can cook the books and make things look like something they're not.

Someone's willing to pay $920 for an ounce of gold delivered in March. You agree to deliver it. Or someone's willing to pay you if interest rates rise in exchange for your being willing to pay them if they drop. Or you pay someone for the right (but not obligation) to purchase an asset at a fixed price at some point in the future.

It's not like this is rocket science.

[Position Limit]

[QUOTE=Vaevictis]Thing is, I don't see why they would need to be regulated by the SEC.QUOTE]

i agree somewhat. it seems the OTC market for derivatives seems to be fairly efficient and transparent between banks and other financial institutions. it's when some unsuspecting party gets involved, tits get ripped off. i'm not sure if CDO's and CMO's are regulated, but that's just another derivative mess. it's hard to imagine times being so tough for jp morgan that they are now going after the milk money. whatever.

[Chuck Bao]

Thing is, I don't see why they would need to be regulated by the SEC.

Pricing of these securities is well understood, and is easy to determine. It's not like a company stock where the company can cook the books and make things look like something they're not.

Someone's willing to pay $920 for an ounce of gold delivered in March. You agree to deliver it. Or someone's willing to pay you if interest rates rise in exchange for your being willing to pay them if they drop. Or you pay someone for the right (but not obligation) to purchase an asset at a fixed price at some point in the future.

It's not like this is rocket science.

Financial institutions CANNOT ever be counted on to regulate themselves. EVER.

Markets are not as open or as transparent as we would like to think.

You can say that this is just a contract between two private parties. In my opinion, these were sold to the public (I would count municipal managers as public) and should, therefore, fall under the regulatory control of the SEC.

And, why is the FBI getting involved?

[Vaevictis]

Financial institutions CANNOT ever be counted on to regulate themselves. EVER.

You can't count on any industry to self-regulate so long as there is a profit motive to misbehave.


Markets are not as open or as transparent as we would like to think.

The question is: Are they transparent enough that the added overhead associated with regulation would be more burden than it's worth?

In this case, I don't see any evidence for additional regulatory requirements. The school boards essentially seem to have agreed to sell a interest swap options to the various banks. If I'm correct in my understanding of what happened, it's not like these are difficult to value (and hence, it's not difficult to figure out what the packaging fees are) and it's not difficult to figure out what the possible downsides are.

These guys are just ****ed because they got bit in the *** when the market moved the other way. Here's a hint fools: If a bank is going to pay you $750k up front, you can be damned sure there's a distinct possibility of downside in the future. Money ain't free.

Oh, and by the way Chuck: How are the negotiations going?

[Chuck Bao]

The question is: Are they transparent enough that the added overhead associated with regulation would be more burden than it's worth?

That's a very good point. And, the regulators / credit rating agencies, etc. haven't exactly done a stand up job until after the damage is already done and it is pretty obvious to everyone. I can't believe that I was naive enough to suggest that. I probably should only be posting in a drunkytown thread.


Oh, and by the way Chuck: How are the negotiations going?

Not good. And, not to hijack this thread, I'll resurrect that other one.