"We were desperate for money."
He later described the result of that desperation more succinctly:
"It's like we got raped."
The experience of Bethlehem, a former steel town of 72,000 people, was similar. In April 2005 the Bethlehem school board was told they could generate over $11 million over the next 25 years while protecting interest rate moves on two prior bond issues.
The board signed on, sold eight interest-rate swaps, and to date has received about $900,000.
Not nearly as much as the transaction fees generated for the parties involved. Those fees for one deal totaled about $3 million, including $900,000 for JPMorgan Chase and $840,000 for the brokerage firm Morgan Stanley.
A sales firm that acted as advisor and a financial advisory firm were each paid $630,000. In total, the sales firm has been paid $1.6 million and the advisory firm has been paid $1.3 million by the Bethlehem school system. JPMorgan Chase and Morgan Stanley have split $5 million.
All for helping the Bethlehem school system solve their financial difficulties. The $7.9 million total is slightly more than $500 per student.
And Many Other Pennsylvania School Systems.
Since Erie signed on, at least 500 similar deals totaling about $12 billion have been proposed to municipalities and school systems in Pennsylvania. Almost all these proposals were privately negotiated, without public bidding, apparently based on representations made by banks and financial advisors that competitive bids were not required, were not desirable and would not be in government agency's interests.
Cash-poor local school districts and municipal government agencies in struggling communities can't afford to hire on-staff, genuinely unbiased experts who understand complex financial derivatives. Even most financial derivatives salesmen with multi-million dollar annual incomes don't fully understand the products they're selling.
As a result, Erie school board members weren't able to know whether they were getting a good deal or were getting fleeced by Wall Street and New York bankers. All they knew was that the payments would help balance their severely strained operating budget.
As the Erie schools superintendent explained:
"We're always at the mercy of the experts that advise us..."
Failure of SEC Regulation.
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