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Friday, August 6, 2010

Exotic Deals Put Denver Schools Deeper in Debt

The New York Times released a story yesterday called "Exotic Deals Put Denver Schools Deeper in Debt".  This story describes how, in 2008, the Denver school district had a $400 million dollar gap in its pension fund and how they entered an highly complex deal with JP Morgan Chase to fill that gap.  Suffice it to say none of the board members understood the deal they were getting into and entered into an agreement lasting 30 year fixed rate.  To renegotiate the deal at a lower rate it would have to pay penalties and fees which were way beyond the school districts reach.  In two years there is still a gap $389 million even though 400 million had already been put into the fund in 2008.  I would start off by saying, why didn't the board get a financial consultant for a deal of this size?  Wouldn't that be standard fair for that kind of money?  If not, it should be.  Another think, most of the board didn't understand the investment vehicle they were getting into (reinforcing the reason for a financial consultant to assess risk).  As I once heard Warren Buffet say, if the deal is so complex you don't understand it, then don't get into it.    [ read more... ]

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