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When Will They Learn, Version 47

Posted By Barry Ritholtz On August 27, 2012 @ 7:31 am In Fixed Income/Interest Rates,Really, really bad calls | Comments Disabled

“This is way worse than loan sharking. And Poway is the poster child. What they have done is absolutely insane.”

-Michael Turnipseed, executive director of the Kern County Taxpayers Association

 

 

Once again, a group of rubes got rolled by The Street.

The latest suckers to get taken by three card monte? The Poway Unified School District, which despite a good credit rating, will pay tax-exempt interest of 6.8% through a complex Wall Street originated exotic loan offering — no payments for 20 years!

Had the district done a straight up school bond offering, it would have paid 4.1%.  That interest rate differential is enormous over the 40 years or so the $105 million borrowing covers: About $300 million for the normal bond offering versus a billion for the exotic version.

Even worse, the motivation for this absurdity seems to be the district’s desire to avoid tax increases. It is yet another attempt at a free lunch. The district thought that the Street would help them come up with “creative financing” to resolve their budget woes. Another attempt at lead into gold!

Below are the bullet points of my rules [1] that are should be basic guidelines for dealing with Wall Street. Poway seems to have violated about half of them:

1. Reward is ALWAYS relative to Risk
2. Overly Optimistic Assumptions
3. Legal Docs protect the preparer (and its firm), not you
4. Asymmetrical Information
5. Motivation
6. Performance
7. Shareholder obligation
8. Other People’s Money (OPM)
9. Zero Sum Game
10. Keep it Simple, Stupid (KISS)
11. Counter-Parties
12. Reputational Risk
13. New Products & Services
14. Lawyer Up
15. There is no free lunch

Full details are here [1].

 

 

Previously:
15 Inviolable Rules for Dealing with Wall Street [1] (October 25th, 2010)

 See also:
Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools [2] (Voice of San Diego)

Schools Pass Debt to the Next Generation [3] (NYT)

A Cautionary Tale for our Times

http://rpseawright.wordpress.com/2012/08/24/a-cautionary-tale-for-our-times/


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2012/08/when-will-they-learn-version-47th/

URLs in this post:

[1] my rules: http://www.ritholtz.com/blog/2010/10/15-inviolable-rules-for-dealing-with-wall-street/

[2] Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools: http://www.ritholtz.com/blog http://www.voiceofsandiego.org/education/article_c83343e8-ddd5-11e1-bfca-001a4bcf887a.html

[3] Schools Pass Debt to the Next Generation: http://www.ritholtz.com/blog http://www.nytimes.com/2012/08/17/business/schools-pass-debt-to-the-next-generation.html

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