Prop. 30 funds for UC will go to Wall Street

By Adam Goldstein and Jacob Habinek

Passing Proposition 30 prevented hundreds of millions of dollars in near-term cuts to the University of California, a laboratory of innovation that fuels our state’s economy. But now a large part of that lifeline might be squandered in payments to Wall Street banks, according to a report released Tuesday by researchers at UC Berkeley.

Over the last decade, the UC Board of Regents has engaged in risky deals with Wall Street banks called interest rate swaps. Banks sold swaps to the university and other public institutions as insurance against rising interest rates on variable rate bonds. Under a swap agreement, borrowers such as the university paid a fixed rate to the bank in exchange for the bank paying the university a variable rate based on the markets’ interest rates for borrowing.

Now these swaps have turned out to be losing bets. UC is taking huge losses because interest rates plummeted following the financial crisis of 2008 – allegedly in part because of illegal manipulation by the same banks that sold the swaps – and have stayed at record lows. Swap deals already have cost UC nearly $57 million, with $200 million more in losses anticipated. Of the $250 million UC expects to receive from Prop. 30, some $10 million a year will go to swaps payments unless the deals are ended.

In other words, the UC Regents forgot the first rule of casino gambling: The house always wins. Now the rest of us are paying the price.

It’s hard to overstate the cost to students and taxpayers of UC management’s financial strategies. In recent years, the Regents have overseen a threefold increase in in-state tuition, declining in-state enrollment, reduced course offerings and draconian cuts imposed on UC workers. They also have continued to increase the number of university executives making more than $200,000 annually.

Even with the passage of Proposition 30, the regents warn of more cuts and tuition increases in the near future.

All over the country, municipalities, universities and nonprofits fell prey to the swap scam. But many of these entities (including the Asian Art Museum of San Francisco and the cities of Oakland and Los Angeles) have undertaken aggressive efforts to renegotiate their swap agreements. Others are pursuing litigation to hold banks accountable. In contrast, the UC Regents so far have taken little action to stem the university’s losses.

These swap deals are part of a dramatic change in UC’s relationship with Wall Street. In 1990, none of UC’s top management or regents had direct ties to the major Wall Street banks. Today, those banks have a growing foothold among top UC management with direct oversight over UC’s finances.

For instance, the chief financial officer, Peter Taylor, came to UC from Lehman Bros., where he was managing director for public finance until Lehman collapsed in the largest bankruptcy in American history. While Taylor was at Lehman, the company was hired to help expand UC’s debt load. Lehman ultimately was party to one of UC’s interest rate swaps – a bad deal that has already cost the university more than $23 million.

California taxpayers have entrusted the regents with stewardship of the university, but the regents’ cozy ties to Wall Street raise questions about their financial priorities. It’s time for the UC Board of Regents to stop gambling with California’s future.

The millions of Californians who voted for Proposition 30 deserve nothing less.

Learn more

To read the full report “Swapping Our Future,” go to sfg.ly/WZzbgM.

Adam Goldstein and Jacob Habinek study the economic sociology of financial markets. They are both doctoral candidates in the department of sociology at UC Berkeley.

[Source]: SF Gate