An Op-Ed Piece from Shawn Yde...

Page A1 of the Sunday New York Times is hardly a hidden corner of American journalism. On November 2nd, that is where you could find me telling a reporter “this is something I’ll regret until the day I die.”

I was referring to my disappointment related to an investment made by the Whitefish Bay School District, where I serve as Director of Business Services.

In 2006, our financial advisor from Stifel Nicolaus presented a plan to our board to finance “Other Post Employment Benefits” for our 306 active staff and 53 current retirees. Whitefish Bay ultimately invested $10 million in the program, while four other districts contributed the other 95% of the $200 million total financial commitment. Within months it became clear that the AA rated investment we were promised was not what we got.

Hence, my regret.

But regret is not remorse – the chain of events that led to the New York Times front page was out of the control of the school districts, and lay in the hands of the Royal Bank of Canada which certainly knew the product we were “buying” was not as represented and was, in fact, loaded with RBC’s toxic debt. This is the issue that is now before the courts.

In the extended Times coverage, packaged under the title of “The Reckoning,” Whitefish Bay was used to put a hometown face on a global problem. As the reporter tracked the funds invested from the U.S. to Europe and back again, the story left readers with questions remaining from much closer to home.

Why did RBC market these toxic securities?
Why did RBC target the districts?
Why did the districts make the risky investments?

RBC marketed these Collateralized Debt Obligations and Credit Default Swaps to generate fees, and to bury its risky investments in the districts’ accounts.

The districts were targeted for the same reason Willie Sutton robbed banks: It’s where the money is. In Wisconsin, $289 of every $1,000 of income comes from State and Local government spending. School districts usually represent half or more of local government revenues. And, schools have had a long history of issuing debt and investing in assets that would rarely if ever be found in an individual account. Often, due to the magnitude of the investments, special programs are created specifically for districts, such as the “GOAL” program developed by Stifel and RBC and sold to us.

For years, school districts had very little latitude in making their investments and in contracting debt. They could deposit money in a bank that is licensed to do business in Wisconsin, issue bonds Aa/Aaa or buy commercial paper rated Aa/Aaa. When the legislature approved bank-supported legislation to permit districts wider investment decisions, organizations like RBC and Stifel were soon at the door with their complicated new products.

Court records show our concern was that the investment qualify under the earlier, more stringent law, which had proved to be prudent guidance over the years. You see, there is nothing exciting about school district finance. Our first priority is always the safety of the investment. We understand as well as anyone that every dollar spent on education is precious. We were assured, in public hearings, that the investments indeed complied with the rules as they existed prior to Act 99.

At that time, we did not know that banks like RBC were packaging dubious securities and foisting them on the public. It wasn’t conceivable at the time that financial institutions with (then) hundreds of billions of dollars in assets would dare to package subpar debt as a gilt-edged securities, and dump them on municipalities across the nation.

Even worse, we didn’t own any securities, as we thought – we were in a position where we were insuring the securities. Absurd! School districts do not invest in such things – at least not here in Wisconsin. These investments would never be permitted before or after Act 99, and both Stifel and RBC clearly knew that and yet concealed this truth from us – burying it in a couple cryptic references among hundreds of pages of fine print.

The districts were trying to guarantee a secure future for our employees without increasing the burden on our taxpayers or decreasing the funds available to our students to fund their education. Our trust, the trust of the public and the integrity of the marketplace itself was abused.

The school districts’ lawsuit is now the national symbol of how Wall Street abused Main Street. It will also serve as the model for how Main Street fights back.

Shawn Yde