While watching the shocking “Bloody Tuesday” banking industry collapse on September 16th, you may have been confused by the mention of “credit default swaps” (CDS) cited as one of several culprits in the banking collapse. The CDS’s they were talking about are the derivative first cousins of the “auction-rate securities” MAMU and MDFB have been swindling our cities into so they could get utility revenue bonds issued without the constitutionally required local voter referendum. With the derivatives, MDFB, MAMU and Wachovia bank could make money swapping the floating interest rates of our long term bonds. The definitions of these two types of derivatives (there are other kinds) are in the links above. In short, both are contributors to the meltdown and they are equally toxic but to different victims. The credit default swaps are bets between two bank gamblers that a third party will or won’t default on a debt. Auctions-rate securities are derivatives of long-term maturity debt instruments i.e. corporate or municipal bonds where the interest rate is regularly reset through a dutch auction giving the municipality a bouncing and unreliable interest rate. Like a truck load of angry rattlesnakes, auction-rate securities should not be dumped in any small town, school district or other public entity just so a few elected officials can get money for their pet pork projects but avoid the wrath of their constituents in the voting booth. As Jefferson County, Alabama learned to its sorrow, when it comes to public financing “Boring is Best.” Public entities should stick to plain vanilla revenue bonds with no derivative gambling features attached. Old-fashioned bonds are safe, easy to understand and they never slither up your pant leg and bite you in the ass.
What does the banking meltdown have to do with us? The federal bailouts are happening in the Wall Street stratosphere of high-finance. The guys begging for bail-outs from our politicians are greedy pinheads, the Gordon Gekko’s of the investment banking world, and they deserve to bleed out…slowly. Unfortunately the other pinheads in Washington who failed in their oversight duties will probably bail them out one way or another. We, on the other hand will sit here like ducks during hunting season holding our rotten derivative loans that our little towns got through MDFB and MAMU but because we have no Washington lobbyists to bail us out we will eventually have to pay for our stupid mistakes. Unlike the too-big-to-fail banks, no one is going to bailout the Rolla’s, Owensville’s or Hermann’s because we’re too-little-to-rescue.”
Example: On Wednesday morning the Bloomberg ticker announced: “Alabama County Sued by Bond Insurers Seeking Resolution to Debt Crisis.” Bloomberg’s ticker also said: “Princeton Interest Rate Quadruples on Lehman-led Debt Issue.” Both the Good ole’ Boy Alabama pols and the prestigious Princeton eggheads made the same greedy mistake. They both let slick investment bankers sell them “good as cash” derivative swaps like the ones MAMU sold their member towns – not credit default swaps like AIG’s, but auction-rate securities spun off their revenue bonds. Now the same crooks and liars that sold our dumb town officials these risky gambling instruments are going to be squeezing both the public and non profit institutions at the end of the sucker line to get the cash they need to cover their own losses. The quote of the fictional Gordon Gekko: "Greed is, for lack of a better word, good" wasn’t a movie invention, it was taken right out of the Wall Street playbook.
So with this collapse of the investment banking system the dominoes will fall on every bank including Wachovia. Our Secy. of State Robin Carnahan thinks she has a deal with Wachovia to pay back some of their individual victims but bigger sharks are after Wachovia for their own purposes and Wachovia may not last out the week. After the failure of the House bail-out vote it’s like watching one of those slo-mo films of an old casino imploding. Carnahan is still “thinking” about whether she will investigate or take any action against MDFB and MAMU. If somebody doesn’t, all of the MoPEP and MJMEUC members who let themselves be herded by MAMU into the very same auction-rate securities market will be like the kid at the end of the snap-the-whip line at the ice rink – they’ll be slammed into the wall at a high rate of speed just as Princeton and Jefferson County were when their auction-rate floating interest rates quadrupled. When the Minnows of MAMU say they can’t pay Wachovia (or whoever owns them next) four or five times the variable interest rate that they told their borrowers would be such a good deal, Wachovia will sue to get the money that – however immorally – is still quite legally owed to them. After all the Gordon Gekko’s need every dime they can find to cover their own losses in the rotten derivatives market they got us into.
Our problem is two pronged and only the second one has to do with derivative swaps:
PROBLEM #1 – MJMEUC audits have failed to recognize $2,160,352,403 in liabilities which are now the debts of MoPEP member towns because each town “owns” a % of that debt.
· If or when authorities finally investigate MDFB and MAMU, (as they so richly deserve) their ‘07 management letter says their accounts for the past three years are in such poor shape that it would be difficult - but not impossible - to figure out what the collateral damage is to their small town victims as a result of Kincheloe’s power plant shopping spree. The MJMEUC 2007 management letter confessed to “significant deficiencies” and “material weaknesses” of MJMEUC and all affiliates which means that at least their last three audits (or more) are generally worthless because, 1.) They use Quickbooks which is inadequate for the complex calculations they should have been making. 2.) The complex calculations they should have been making on MJMEUC-MoPEP liabilities for what is now a $2,160,352,403 debt for equity investments in eight power plants have not been reflected in their ’05 to ’07 audits so the audits are incomplete and totally misleading as to the financial condition of MAMU, MJMEUC and MoPEP. 3.) The MJMEUC accounting and billing staff are spread too thin and they were too inexperienced to cope with the “increased complexity of accounting needs.”
· Because of the “significant deficiencies” and “material weaknesses” of the incomplete audits of the prior years of MJMEUC audits, the 32 cities that are member investors in MJMEUC-MoPEP haven’t had correct contingent liability information from MJMEUC on the $2 billion in revenue bond debt which each member should have passed on to their own auditors so that liability could be correctly reflected in their city audits. The reason the information about their percentage share of MJMEUC’s $2.1 billion debt should have been included in their local audits is to show the full extent of each town’s contingent liability for the highly-leveraged revenue bond loans Kincheloe (MJMEUC-MoPEP) took out to buy equity positions ($2,160,352,403) in coal-fired power plants that have constantly rising construction costs. Why is this disclosure at the local level necessary? Because their monthly electric revenues are pledged as collateral for MJMEUC’s power plant investments! If things go wrong, their electric revenues can be seized to pay MJMEUC’s investment debts and this would leave the individual member cities with little or no revenue left to pay their own expenses. Full disclosure would at least provide them with a warning so they could take steps protect themselves against a major loss of electric revenue.
Example: To this date the City of Rolla alone has an estimated total contingent liability of $131,851,727.60 for the power plants (not including their other share of MJMEUC-MoPEP overhead and other debts that are passed through each month as a “direct cost”). The unfortunate utility rate payers of Rolla have no idea they have an outstanding obligation that is six times their annual city budget! To find out what the contingent liability of the total MJMEUC-MoPEP debt of $2,160,352,403.89 is for your MoPEP town, go to the updated 2008 Schedule M attachment to the MoPEP contract and do the math to see what your town is obligated to pay. The Schedule M lists are titled, “This Exhibit allocates shares of Resource Obligations for the purpose of implementing MoPEP #1 Agreement Section 15.8. [of the MoPEP contract].” It also says the “Allocations of Resource Obligations apply only to Pool members for whom the Agreement is cancelled,” but that’s not true. The Schedule M “Allocation of Resource Obligation” percentage determines the size of a lot of the bills MoPEP sharecroppers are paying now and the really big ones they will pay in the future.
PROBLEM #2 – the toxic MAMU pool loans with their floating interest rate derivative swaps.
· Most MoPEP members still don’t know they’re directly involved in the national news stories about the collapse of auction-rate securities and credit derivative swaps but if they borrowed money for diesel generators or any other local utility project over the last eight years through MAMU and MDFB they are hanging right up there with Bear Sterns, Lehman and AIG, it’s just that Kincheloe hasn’t bothered to tell them yet. If Wachovia (formerly A. G. Edwards and soon to be somebody else) like the other big 10 banks this week, is looking for cash to shore up their losses so they can avoid a Washington Mutual fate, they will do what other banks are doing to Jefferson County, Alabama and Princeton - suing to get what they can out of the customers they sold floating interest rate loans with derivative swaps. The con was perpetrated nationwide. In addition to MAMU’s victims, in Pennsylvania alone there are 110 school districts whose loans are contaminated with derivative swaps and who may be sued like Princeton and Jefferson County if they refuse to pay interest rates that may have suddenly doubled or quadrupled.
· The member towns MAMU pimped to get their utility project funded through the MDFB bond pools are 100% exposed to “Bloody Tuesday’s” meltdown in the banking-derivatives market but MAMU’s debtor towns don’t know how much their exposure is because MAMU has never given their auditors the information about the extent of their so-called “revenue bond issues” for their diesel generator or other utility project that was funded through MAMU and MDFB. The information on what the current “swapped” interest rate is on their floating interest rate loans would alerted their auditors to what the current interest rate swaps were costing them and what multiples they might have to pay if the system collapsed - as it just did. At the time he arranged their MAMU* utility revenue bonds through MDFB, Kincheloe did not explain to them how dangerous derivative swaps were. It’s quite safe to assume that none of the elected officials, who rubber-stamped the MAMU loan deals they were so happy to get so they could avoid a public vote, would know a derivative from a dumpster. They just wanted somebody to do the paperwork and give them a check. They always “trust the experts” anyway so no explanation was necessary. The Gordon Gekko’s figured it was a waste of time to give them information they don’t want and couldn’t understand. (*MAMU takes an administrative fee of 1.5% on the declining balance for the term of each loan so they have no incentive to advise anyone that this is a high-risk deal that they shouldn’t be in.)
· The ’07 William’s Keepers management letter confessed to “significant deficiencies” and “material weaknesses” of MJMEUC and all affiliates for the last three years but they were referring to the $2 Billion in new MJMEUC debt for the coal-fired power plants that has never shown up on MJMEUC’s books. The auditors do not seem to be aware that there is another “material weakness” which is MAMU’s involvement in the auction-rate securities market. Their audits have also not exposed the full extent of the liability MAMU has with the third-party loans they’re involved in and their risk of being sued by members when they figure out who led them into these toxic loans by not giving them full disclosure of the risks.
Our Secretary of State Robin Carnahan got a settlement out of Wachovia for some individuals who complained but it remains to be seen if Wachovia survives to pay them. Wachovia is now on the chopping block and Carnahan may not have a deal anymore or the remnants of Wachovia may not have the money to pay anyone back. That may be the end of her interest in this crisis but we hope not. We hope there are some elected officials in this state who aren’t Gekko clones.
If MJMEUC and MAMU ever get their bookkeeping problems straightened out it’s unlikely they will ever admit to their culpability by sending out a letter to each Mayor of the MoPEP member cities with the MAMU loans with a message that might go like this: “Greetings MoPEP-ers, Remember those coal-fired power plants we told you about? Well it’s the funniest thing but we have just figured out that you are now liable for $68 million of our hasty investments…”
