The passage of Proposition 30 by voters in the last election prevented hundreds of millions of dollars in near-term cuts to the University of California. NOW, a large part of that money might be squandered in payments to Wall Street banks, according to a report released by UC Berkeley researchers today and reported at SFGate.com. The authors of the SFGate.com article are Adam Goldstein and Jacob Habinek. Both are doctoral candidates in the department of sociology at UC Berkeley, studying the economic sociology of financial markets
The NAME of the risky GAME: interest rate swaps….
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.
In other words, the UC Regents forgot the first rule of casino gambling: The house always wins. Now the rest of us are paying the price.
The financial cost of UC management’s financial strategies to students and taxpayers is difficult to overestimate! “In recent years, the Regents have overseen a threefold increase in in-state tuition, declining in-state enrollment, reduced course offerings and draconian cuts imposed on UC workers. They also have continued to increase the number of university executives making more than $200,000 annually. Even with the passage of Proposition 30, the regents warn of more cuts and tuition increases in the near future.”
What is WRONG with the UC Board of Regents?!!
The UC Berkeley report suggests that one of the problems might be that old (sometimes illegal) (mal)practice of American business: “The Buddy System.”
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.
All over the country, municipalities, universities and nonprofits fell prey to the swap scam. But many of these entities (including the Asian Art Museum of San Francisco and the cities of Oakland and Los Angeles) have undertaken aggressive efforts to renegotiate their swap agreements. Others are pursuing litigation to hold banks accountable. In contrast, the UC Regents so far have taken little action to stem the university’s losses. <emphasis mine>
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.
Since I completed my college education in other states, I had a hard time understanding the attitude of some of my well-educated friends who attended UC schools. I think that I understand MUCH better, now.
The cozy relationship between the UC Board of Regents and Wall Street Banks deserves closer inspection, perhaps by the California Attorney General’s Office, for possible conflicts of interest that could hamper the forward financial progress of California.
You can read the full report, Swapping Our Future: How Students and Taxpayers are Funding Risky UC Borrowing and Wall Street Profits, which is available to download as a PDF file here: http://publicsociology.berkeley.edu/publications/swapping/index.php
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