U.S. schools burned by market crisis

[sld123]

U.S. schools burned by market crisis
www.eschoolnews.com/news/top-news/index.cfm?i=55995

[rw]

We voted on 2 measures in the general election to allow state government employees/retirees pensions or local government employees/retirees pensions to be invested in the stock market. Neither measure passed as the stock market had just crashed days before.

[Mayleng]

This crisis is so far reaching and massive. There are many many many job losses here.

[sisdparent]

I didn't get all the way to the bottom of the article, but it looks like those districts at the least failed to do their homework on what they were buying and at the most may have been defrauded by the Stifel, Nicolaus & Co. Inc., I think those districts were in trouble regardless of the market, however the current turmoil just brought it to light much faster. The vast majority of districts are restricted to very conservative and safe investments by local policy or state law. Retirement funds are usually managed by the state and are subject to different rules. The big picture is that most taxpayers do not understand how their districts manage their money, their bonds and their investments. Six months ago, brokers at Bear, Stearns went to prison for bribing trustees of our district to hire them to manage our money.

[kewpie]

>Six months ago, brokers at Bear, Stearns went to prison for bribing trustees of our district to hire them to manage our money. <

Shocking!! The greed that has pervaded this country in the last 20 years is disgusting..

I recently watched the movie "Wall street" made in 1985 with Micheal Douglas, Charlie & Martin Sheen.
It could have been made yesterday.

[2kids]

The market is very manipulated. The big guys really do control if a stock goes up and down. Lately its down:( But the main thing is to have good stocks that dont rely on consumer spending. Make sure they have capital to get them threw the bad times ect..

[SharonF]

I heard a very long but thorough series on NPR about these investments and those school districts. I hope I remember the details accurately.

Bottom line: everyone has been looking for easy ways to engineer money. Not earn money. Engineer it. That's true for everyone with a 401K, 503b, or 529. We want our money to make money faster than the rate of inflation--without us working for it.

One of the problems goes back to a change in the type of bonds governments are allowed to issue. The $200 million in those Wisconsin districts was in variable rate bonds, not fixed rate bonds. If a government chooses to sell variable rate bonds, the bonds must be underwritten by a "liquidity bank."

Depfa is a liquidity bank. Completely legitimate. Completely legal. But Depfa was hedging way too much capital in hopes of engineering money faster. As were most banks in the US and worldwide.

One of the Wisconsin school district execs was interviewed by NPR. He said the Depfa documents they signed were three INCHES thick. But he did his best to read all of them. The school bonds were secured by Depfa's investments in very legitimate, well-known US companies. When the school district exec saw the company names a couple years ago, he thought everything was fine.

Look through those company names now, and you can guess what happened: Washington Mutual. Fannie Mae and Freddie Mac. Lehman Brothers. Bear Stears. When Depfa was close to failing, so were the companies in which it had invested heavily. And Depfa had underwritten those schoolhouse bonds in Wisconsin. Same with other liquidity banks that had underwritten municipal bonds around the world. Depfa doesn't have enough money to pay off the people who bought those bonds.

What's worse is the impact of Credit Default Swaps. An even more complicated way for someone to make money out of thin air. It's kind like the opposite of buying stock. When you buy stock, you are betting the company's value will increase.

With a Credit Default Swap, you essentially bet that a company will lose money. You buy a CDS from someone who believes that same company will not lose money. If the company does go bankrupt and can't pay off its bonds, the buyer of the CDS gets the money from whoever sold them the CDS. Congress made Credit Default Swaps legal in 2000. The bill bans government regulation of Credit Default Swaps. The bill was introduced the week before the Christmas recess in 2000 and rushed to approval. The bill was 11,000 pages long.

AIG sold CDS but never bought them. Right now, AIG owes $440 billion dollars to cover CDS losses. It doesn't have that much money. Like Depfa, it gambled with other people's money and lost.

I honestly think that people who run school districts did NOT understood all of the risks. They were looking for ways to sell bonds to finance school construction and renovation. These are extremely complicated transactions. I honestly don't think even the people selling those credit derivatives understood that it all was a house of cards.

But guess who is left holding the (empty) bag!

[sisdparent]

Thanks for the great explanation. That's way beyond what our district investment policy allows. (Thank goodness for small favors.)

[zippity]

Great explanation. Nice to learn something other than measures and education. My husband has been a savvy businessman for years. We never spent what we didn't earn and we still lost our retirement through Enron. Didn't find out for 1.5 years after the fact because of the constant buying and reselling of bonds that our companies were invested with. They were originally 401's through old employers. When it came time for us to roll into IRAs being self employed, the chain crumbled.

Then there has been the big bubble, he pooh poohed it. We almost bought up once our house hit a ceiling in the market but decided not to. I am so glad we didn't. We have hurt for the last several years downsizing and downsizing our business. The worst was Christmas 2 years ago we even shut down our warehouse. We had to move more and more things overseas to not lose our shirts. Our desire to be frugal was sometimes out of pure necessity and I am so glad. We sold our trucks and bought a used hybrid, DH took a second job for awhile, we turned off the second freezer (miss it), only replacing stuff as it broke - not because I wanted the newer appliances (which I did but held off). Just the little things were getting us by to stay above water.

I am so sad for families that, for whatever reason have been hit and hard recently, lost jobs, higher utilities, loss of pensions, etc. I am sure we will have our share, everyone will, just not sure what form it will take now that we have been getting back on our feet. Oh, how could I forget, dumping our kid out of SPED and losing health insurance, that is a start. I am not sure which I am more PO'ed about. One thing I have learned through my years of things going up and down, I certainly know how to live down, living it up is definitely not taken for granted when that rolls around. I am so grateful for having a connection via the internet. Who needs a therapist?