Tuesday, November 04, 2008

When School Districts become Financial Intermediaries

Bad stuff happens. I was listening to a remarkable NPR Story this morning about the Whitefish Bay School District.

The school district borrowed $165 million to purchase Collateralized Debt Obligations. Now that the CDOs are failing, the district may have trouble paying its loan back. So the bank holding the loan will have its capital position erode...etc.

This sort of thing happened to Orange County in the early 1990s. It sure would be nice if we didn't have to learn the same lessons over and over again.


Don Coffin said...

I read the New York Times article about this (http://www.nytimes.com/2008/11/02/business/02global.html?_r=1&scp=1&sq=whitefish%20bay&st=cse&oref=slogin) and was stunned that anyone thought it was a good idea to borrow $165 million for this purpose. The people who sold them on this use of funds were, um, not acting in the best interests of their client. But the people who decided to leverage themselves to that extent were...how do I want to say this?...well, stupid is the word that comes to mind.

Anonymous said...

I could be wrong, but I think OC got themselves into trouble again, but this time with auction rate securities. These were sold to school districts and municipalities all over the place. Tried to find an accurate accounting of just how much of this junk was sold, to no avail. We are all small norwegian fishing villages now.

Anonymous said...

This is what comes from negative real interest rates. Entities of all types borrow the free money, and make absurd leveraged bets with it.