Denver Schools Screwed

God, I hate bond dealers and the scummy politicians who so blithely screw the people they’re supposed to represent. Via Taibbi:

Gretchen Morgenson of the New York Times is single-handedly resurrecting the Gray Lady’s reputation as a muckraker of the first order. Having already blown a big hole in the side of Goldman Sachs with her December, 2009 story exposing its crooked deal with hedge fund king John Paulson, Morgenson this week took an ax to Colorado’s Democratic Senator Michael Bennet, uncovering a Jefferson-County style scam he helped perpetrate on the Denver School system on behalf of several Wall Street banks (including primarily JeffCo villain JP Morgan Chase) while acting as Denver’s school superintendent years ago.

The essence of this deal is that Bennet arranged for the Denver school system to raise $750 million for its pension fund using an exotic transaction that involved interest rate swaps. Had the schools raised money using traditional fixed-rate bond issues, the debt would have featured 7.2% interest rates. Instead, Bennet and JP Morgan worked together to raise bucketloads of cash from investors using variable-rate debt with interest rates of about 5%. The banks then slapped an interest-rate swap on the deal that allowed the Denver school system to mimic a fixed-rate loan — for a fee, of course.

Again, just like in Jefferson County, Alabama, the basic idea here was similar to a homeowner who buys a house with an option-ARM mortgage instead of a traditional fixed-rate loan. You pay less in interest up front, but you’re more exposed if the rates change in the future. So to protect against rate changes, you enter into the interest-rate swap, by which a bank like JP Morgan assumes your variable-rate risk in exchange for a fee.

Imagine Satan’s very own credit card contract agreement and you get a sense of how much this borrowing is costing the citizens of Denver; so far, the school system has already paid over $115 million in interest and fees since the deal was struck, or about $25 million more than originally anticipated.

And just like the Alabama sewer deal, where JP Morgan slapped an absurd $750 million termination fee on Jefferson County when the deal went south, in Denver the only way out of the deal is an $81 million termination fee, which Morgenson notes would be roughly 19% the size of Denver’s annual payroll.

In Jefferson County, local politicians took bribes to sign off on these crappy deals. There’s no such allegation of bribery in the Bennet case per se, but instead what ended up happening is that Bennet, after he left the Denver school system, collected campaign contributions from many of the banks involved, including JP Morgan and Bank of America.