Hidden Rate Swap Fees by JPMorgan, Morgan Stanley Hit Pennsylvania Schools

[Purveyor]

Feb. 1 (Bloomberg) -- James Barker saw no way out. In September 2003, the superintendent of the Erie City School District in Pennsylvania watched helplessly as his buildings began to crumble.

The 81-year-old Roosevelt Middle School was on the verge of being condemned. The district was running out of money to buy new textbooks. And the school board had determined that the 100,000-resident community 125 miles north of Pittsburgh couldn't afford a tax increase. Then JPMorgan Chase & Co., the second-largest bank in the U.S., made Barker an offer that seemed too good to be true.

David DiCarlo, an Erie-based JPMorgan Chase banker, told Barker and the school board on Sept. 4, 2003, that all they had to do was sign papers he said would benefit them if interest rates increased in the future, and the bank would give the district $750,000, a transcript of the board meeting shows.

``You have severe building needs; you have serious academic needs,'' Barker, 58, says. ``It's very hard to ignore the fact that the bank says it will give you cash.'' So Barker and the board members agreed to the deal.

What New York-based JPMorgan Chase didn't tell them, the transcript shows, was that the bank would get more in fees than the school district would get in cash: $1 million. The complex deal, which placed taxpayer money at risk, was linked to four variables involving interest rates. Three years later, as interest rate benchmarks went the wrong way for the school district, the Erie board paid $2.9 million to JPMorgan to get out of the deal, which officials now say they didn't understand.

``That was like a sucker punch,'' Barker says. ``It's not about the district and the superintendent. It's about resources being sucked out of the classroom. If it's happening here, it's happening in other places.''

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http://www.bloomberg.com/apps/news?pid=20601109&sid=ay5LDbjbjy6c&refer=exclusive

[flashl]

1. Not only sucking resources out of classrooms, but municipal by municipal. nt

[RB TexLa]

2. "officials now say they didn't understand"

That about all you need to know from the article. If they didn't understand they are the ones who didn't do their jobs and are the ones responsible. Variable derivatives are very complex investments and not for everyone. If the school board members didn't understand they should have hired someone or utilized an employee that could understand, they are the ones through their malfeasance who caused this.

[flashl]

3. Understood. Why offer complex vehicles that people like Buffet claim not to understand. nt

[donkeyotay]

4. This is happening all over. People made the mistake of thinking

these bankers had their best interests in mind. The Fed runs the interests rates down below the rate of inflation, and the flock rushes into the waiting arms of the fox. One sets of folks makes the profits, and another set pays.

The school board thought they were doing the right thing, the thing that everyone told them they should do to deal with the lack of money.

[knitter4democracy]

5. This is why you need a lawyer on staff.

The asst. supt. should have a JD these days. If not, take that to some parents in the district who are CPAs or work in finance at all, and see what they say about it.