Audio By Carbonatix
Fire Ant — an invasive species, tinged bright red, with an
annoying,
sometimes fatal bite — covers Palm Beach County. Soon, his column will appear twice a week on The Pulp. Got feedback or a
tip? Contact
fire.ant@browardpalmbeach.com.
Would the fine folks at an institution
like Citigroup steal the pennies off a dead man’s eyes? Would they stonewall
the Palm Beach County School District, thereby taking millions of dollars
annually away from public education? We wouldn’t say that. Not yet.
But according to economists at the
Florida Public Services Union, Citigroup is reaping windfall profits
from a deal with the District, a deal that originally made sense but
changed with changing circumstances. The union –an affiliate of the
Service Employees International Union — has urged the District to
renegotiate the deal. But the District has hemmed and hawed and
Citigroup has kept its cards face down. If things don’t change, Fire
Ant may have to revise his judgment about the bank. Here’s the deal:
Back in the early 2000s the School
District issued bonds to pay for school construction. (Reader: Don’t
let those eyes glaze over.) They agreed to pay the bondholders a
variable rate of interest, that is, one that varies with the rise and
fall of interest rates in general.
To protect against a spike in rates,
the District cut deals called “interest rate swaps” with Citigroup and another bank, UBS. These deals are complicated, but essentially they let the
District trade a variable interest rate (which is volatile and uncertain) for a fixed interest rate (which is secure and predictable). At the time the deals were cut, the variable rate was low but was expected to go up. The idea was that the bank would make a little bit of money and the District get rid of its risk–a win-win. Champagne all around.
Since then, however, the economy has
nosedived (thanks largely to the Wall Street gang), and with it the
general rate of interest. The banks ended up having to pay the District only a low, low interest rate (below one percent) while the District is on the hook to the banks for a much higher, four percent rate.; According to the unions, the vig is costing the District more
than $16 million a year, and will add up to almost $244 million if
the deals run to maturity. That’s a lot of schoolbooks.
The unions have brought their analysis
to the District’s Finance Advisory Committee and proposed that the
District ask the banks to renegotiate the deals — which other
government bodies in similar fixes have done. The committee says – –for
a variety of reasons that don’t include a substantive rebuttal of the
SEIU’s numbers — they don’t think it’s a good idea.
That’s an advisory committee, however.
The Palm Beach County School Board has also heard the union’s take on
the deals, and it’s the Board that calls the shots. Sources say there
is movement behind the scenes, and District Treasurer Leanne Evans
says the District is “always looking for ways to reduce capital
costs.”
At the same time, Evans told Fire Ant,
“To ask the bank for a below-market rate is difficult.” She says
the District has no leverage–unlike those municipalities that have
successfully negotiated better deals. “We have a budget problem but
not close to others, close to bankruptcy. They’re about to close
their doors. They’re negotiating rates that are crazy for a few
years.”
In any case, Evans added, the union’s
hoped-for better rate is unrealistic. The District needs deals that
run 20 and 30 years, she said, and current long-term rates are
more or less identical to the rates the District pays the banks under
the existing deals.
Which raises the question: What about the
variable rate, the one Citigroup and UBS pay the District and from
which they profit so greatly? Who set that rate so low currently?
One who did is the Federal Reserve, where
Citigroup and its kin borrow money at less than one percent–a rate
the Fed set to bail out the banks after the banks helped crash the
credit market.
Another is the bankers behind LIBOR
(London Interbank Offered Rate), the rate banks charge each other
for short term loans. That’s now as low as less than one half of one
percent–and that rate, the headlines now blare, resulted from
collusion and lying by the big banks, Citigroup and UBS included.
FPSU President Alphonso Mayfield is of
the opinion that, in light of the banks’ unethical and/or illegal
behavior, and the public’s sacrifices on the banks’ behalf, “It now
makes sense to renegotiate the deals–from a moral standpoint. It’s a
chance to provide more for the students.” As for the banks: “If
they end up making eight hundred percent instead of one thousand
percent, it’s not a bad deal.”
SEIU economists point out that the
District is not totally without muscle. They say the District could
refuse to do any further business with Citigroup, joining with other
toxic swaps victims in a boycott. They also point to the potential
for civil litigation and criminal charges over LIBOR and other
bid-rigging scandals.
But maybe it won’t come to that. Maybe
the bailed-out banks will show some humanity and bail out the
District and its 170,000 school kids. Corporations–including Citigroup, which declined to comment for this story–are people too,
right?
