By: GZ on Venerdì 19 Gennaio 2007 20:07
Un piccolo distretto scolastico in Pennsylvania fa uno "swap" con Deutsche Bank (costo dell'operazione, 1 milione di $) per risparmiare sul suo debito e scopre di averci rimesso 230 mila dollari
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Deutsche Bank Swap Makes Pennsylvania Taxpayers Lose
By Martin Z. Braun
Jan. 17 (Bloomberg) -- The third-poorest city in Pennsylvania is a lot poorer because of a 28-year bet on interest rates that already has gone awry.
The Reading, Pennsylvania, school district, which has 18,323 students, this week must pay $230,000 to Deutsche Bank AG, Germany's largest bank, because it's on the losing side of a wager that long-term interest rates will rise faster than short- term interest rates. In April, the board rushed approval of the so-called interest rate swap in eight days after its adviser said the transaction may earn the district $16 million by 2034.
While Reading's taxpayers are liable for the loss, bankers and advisers already have pocketed $1 million in fees for arranging the swap, enough to buy 11 Mercedes-Benz S-550 sedans. This week's payment to Deutsche Bank would have covered the school district's monthly utility bill.
``It was all done in a real hurry,'' said Keith Stamm, the only member of the board to vote against the deal. ``The whole board is so desperate to try to find a way to raise money, they see this floated in front of them as a big-time amount of money and they want to go forward with it.''
Local governments from Augusta, Georgia, to Oakland, California, are being lured by similar opportunities to speculate with derivatives created by the world's biggest banks. Most of the $400 billion of private agreements sold to municipalities escape taxpayers' notice and are little understood by the public officials and administrators who approve them.
Risky Practice
``It's a recipe for disaster and it's also a recipe for sharp practices by charlatans,'' said James Cox, the Brainerd Currie Professor of Law at Duke University and a securities law specialist. ``The gains that a community stands to derive from this are at the margins and the risks they're exposing themselves to, frequently, are greatly in excess of what the expected rewards are.''
While financial firms often promote the agreements as a way for municipalities to lock in borrowing costs for future projects, the swap bought by Reading amounts to a bet on the relationship between short-term and long-term interest rates. If long-term rates rise higher than short-term rates, the municipalities will profit from the agreement and vice-versa.
Trading, Not Hedging
``It's more of a trading strategy than a hedging strategy,'' said Peter Shapiro, managing director of South Orange, New Jersey-based Swap Financial Group, which advises governments on derivatives including interest-rate swaps. ``All transactions include an element of speculation. The ones which are more speculative, like the yield-curve swap, are only suitable for issuers who are more sophisticated.''
A derivative is a financial contract whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather. A swap is a type of derivative, where parties agree to exchange interest payments, usually a fixed payment for one that varies based on the movements of benchmark indexes.
The school board paid Frankfurt-based Deutsche Bank $575,000 to arrange the contract, known as a constant maturity swap, and awarded $400,000 to its financial advisers, including Reading-based Concord Public Financial Advisors Inc. and lawyers for arranging the trade, school officials said.
Ted Meyer, a spokesman for Deutsche Bank in New York, declined to comment on whether the agreement, also called a yield-curve swap, was suitable for the school district. Concord principal Mike Setley didn't return calls seeking comment.
Unemployment Rate
Dennis Kelley, the school district's director of finance, said he was ``surprised'' to learn he owes $230,000. He said the district would pay the money using proceeds from another interest-rate swap.
Reading is a town of 80,000 about 60 miles (96.5 kilometers) northwest of Philadelphia where the unemployment rate is almost twice the U.S. average.
