Back in 2001, a very curious deal was struck between the government of Greece and Goldman Sachs. It was an exotic dollar/yen swap for euros. What possessed Greece to do such an unusual — and expensive — financial transaction? It needed help to hide its large and rapidly growing debt in order to maintain its status as a euro-zone member in good standing.
Both parties had something to gain. Greece created the false appearance of being in compliance with the Maastricht Treaty. This mandates that European Union member states with high debt levels must reduce their debt-to-gross-domestic-product ratio. And Goldman Sachs scooped up a ridiculously large 600 million euro fee. According to Bloomberg News, this accounted for “about 12 percent of the $6.35 billion in revenue Goldman Sachs reported for trading and principal investments in 2001.”
Once again, a new group of rubes got rolled by The Street.
I know what you are thinking: Those silly Greeks. Something like that could never happen here. Before you begin tsk-tsking, allow me to point you to the latest group of suckers to get taken in by The Street’s three-card monte: the Poway Unified School District in San Diego. It took a page from the Greek school of bad finance, agreeing to an exotic and costly bit of Wall Street shenanigans. Despite the district’s strong tax base and good credit rating, its officials bought a complex Wall Street-originated exotic loan offering.
Reminiscent of the bubble days of exotic mortgages, this debt deal makes no payments for 20 years. Over the course of the 40-year financing, it pays a very rich tax-exempt interest of 6.8 percent. Had the district done a straight-up school bond offering, it would have paid 4.1 percent. Over the course of 40 years, this interest rate differential is enormous. Poway borrowed $105 million. Instead of paying $300 million for a normal bond offering, the townspeople are going to pony up nearly $1 billion.
I learned of this festering financial debacle courtesy of the investigative reporting of Will Carless at the Voice of San Diego.
It appears there are no good actors here. What motivated this absurdity appears to be an attempt to avoid increasing real estate taxes on the school district residents. Rather than live within their budget, the district is trying its level best to become the next Detroit. The worst part of all is that by the time the bill comes due, everyone associated with this awful deal will be long gone. It’s a classic case of “I’ll be gone, you’ll be gone” financing.
It is astonishing to think that anyone involved in this mess thought that the big investment firms would help them come up with “creative financing” to resolve their budget issues. If only they’d had a helpful guideline, a set of rules for dealing with the sharks on Wall Street.
So I present “The Inviolable Rules for Dealing with Wall Street”:
1Reward is always relative to risk: If any product or investment sounds as if it has lots of upside, it also has lots of risk. If you can disprove this, there is a Nobel Prize waiting for you.