Last week, the NY Times ran a front page article laying out potential financial damage to Denver Public Schools from a bond issuance done in early 2008 by the school district under the leadership of Michael “Who?” Bennet and Tom Boasberg.

The Bennet campaign complains that a paid supporter of Andrew Romanoff shopped the story to the Times for months and finally got it printed…just in time for the end of the primary election campaign, it seems.  And while that’s certainly plausible, it doesn’t mean that the issues raised in the story aren’t interesting or important.

Radio talk show host Craig Silverman was very rough on Bennet (in Bennet’s absence, since Bennet refuses to show his face to the media, and particularly to that show), but I thought much of Silverman’s ire was misplaced.  Not that Bennet didn’t make a big mistake or isn’t due for some serious criticism; just that it’s not quite where Silverman was focusing.

Here, then, is the note I sent Craig Silverman (whom, I should add, I’m enjoying more and more on the radio with each passing week as he seems more free to speak his mind since switching from being a registered Democrat to registered unaffiliated.)

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Hi Craig,

Here are a few thoughts on the Bennet/DPS article.

First, I wish you’d spent a little more time questioning how and why the Times ran something like that on its front page.  Bennet’s camp claims that it was pushed to the times by a paid supporter of Romanoff’s.  (Note: As I said above, that doesn’t make the story any less true, but it’s an interesting radio topic in itself.)

Second, while I understand how you can make a politician look bad by talking about the fees that the bankers got, and while I acknowledge that those fees do sound rather high, Boasberg is basically right to focus on the total savings to the school district.  The deal that DPS did was much more complicated than a vanilla bond issue and higher fees are appropriate.  I don’t know how much higher would be appropriate; maybe DPS was ripped off, maybe not.  But just because the fee is a big number isn’t necessarily a sign of anything.  As for the total savings to Denver,  I don’t know if his figures are right, but that is the most important thing to look at in terms of immediate impact.

Third, it’s sorta unfair of you to say that they should have known the overall market would crash some months later.  Few people predicted that.  What is fair, however, and deserves even more attention, is the fact that these were auction rate securities, and that was a market which had all but collapsed, at least temporarily, several months earlier, roughly Feb 2008.

This WSJ story gives a sense of it:
http://online.wsj.com/article/SB120295439920567161.html?mod=hps_us_pageone

One problem with the WSJ article: the people who invested in these securities weren’t major victims even though the WSJ article somewhat portrays them that way…they almost all ended up getting out whole, some getting higher interest payments than they had planned. Mostly, they  just lost access to some money for some time. The victims, or rather the losers, were the issuers who had to pay much higher interest rates than anyone previously thought possible.

And some history:
http://www.money-zine.com/Investing/Investing/Auction-Rate-Securities/

An example of an issuer getting out of ARS:
http://www.nj.com/news/index.ssf/2008/03/port_authority_frees_itself_fr.html

With this sort of turmoil having occurred several months before the DPS issue, and with Bennet and Boasberg certainly sophisticated financial people who read the WSJ and would have been well aware of the problem, it is absolutely unconscionable that they risked DPS money in auction rate securities.  This is NOT about foretelling the future, but rather looking at the rather recent past; it was just 2 or 3 months earlier that the ARS market imploded, and then they sign DPS up for an ARS deal?  Now that’s crazy…and negligent.

There is also a big problem with the cancellation fees on the deal.  Every Colorado entity which is in these things and which feels a need to get out (by the way, these are NOT all bad deals even if it was unwise to go into them given what happened in 2008) should negotiate hard with the bankers and tell them they will be out of the running for future business for a decade if a suitable exit isn’t agreed to.   (That said, these deals are not the banks’ fault and the banks should not take losses to help out the municipalities unless the banks really misled those municipalities on the risks, the fees, or other substantive parts of the transactions.)

Anyway, the problem with Bennet and Boasberg was not that they failed to see the future.  It was that they ignored the past.

Best,
Ross