Tuesday, October 28, 2008

Do we have a new Orange County?

Bloomberg.com: Exclusive FBI Proble of JPMorgan Fees focuses on Swaps...:
"Nowhere have JPMorgan's derivative deals wreaked more havoc than in Jefferson County, Alabama, home of Birmingham, the state's largest city. A combination of soaring rates on its bonds and interest-rate swaps is threatening the county with the biggest municipal bankruptcy since Orange County, California's default in 1994."
The article also starts out with a story eerily similar to Citron's defense (I never knew it was risky) in the case of a Pennsylvania School district:
" Joseph Ambrosini says the deal looked so easy. JPMorgan Chase & Co. bankers told him there was really no risk. All he had to do was sign a public financing contract, and the bank would give $280,000 to his school district in New Castle, Pennsylvania.

``They basically said, unless the world goes under the sea, we'd be in good shape,'' says Ambrosini, the district's business manager.

In September, Ambrosini says, his 3,400-student district went underwater. On Sept. 25, the week after Lehman Brothers Holdings Inc. collapsed, the New Castle Area School District's interest rate on $9.7 million of financing arranged by JPMorgan hit 10.6 percent, more than doubling since the month began...."

Don't remember Orange County? Erisk has a very good case study available online.

BTW as a teaching note, this would be a great way to introduce swaps. From this article you could explain what they were and how they operate and how they are now (due to increased volatility) leading to trouble for many investors.

1 comment:

Anonymous said...

These public officials have a fiduciary duty to the public. Send them to jail, next time they'll get an independent third party (maybe you) to assess these deals. I simply would have reversed the swap on them, but that's another story. I'm currently arbing HSBC. They loan me money at 0% (unsecured credit card) and I loan it back to them (insured, FDIC) in a CD at 4%. Fools everywhere. BB