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School districts could lose from deal
Irish bank DEPFA in economic trouble
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Published: November 2, 2008
On a snowy day two years ago, the school board in Whitefish Bay, Wis., met to discuss a looming problem: how to plug a gaping hole in the teachers' retirement plan.
It turned to David W. Noack, a trusted local investment banker, who proposed they borrow from overseas and use the money for a complex investment that offered big profits.
"Every three months, you're going to get a payment," he promised, according to a tape of the meeting. But would it be risky? "There would need to be 15 Enrons" for the district to lose money, he said.
The board and four other nearby school districts ultimately invested $200 million in Noack's deal, most of it borrowed from an Irish bank. Without realizing it, the schools were imitating hedge funds.
Across the country, New York subway officials were also being wooed by bankers. Officials were told that just as homebuyers had embraced adjustable-rate loans, New York could save money by borrowing at lower interest rates that changed every day.
For some of the deals, the officials were encouraged to rely on the same Irish bank as the Wisconsin schools.
School districts, transit agencies and other government entities were quick to jump into the global economy, hoping for fast gains to cover growing pension costs and budgets without raising taxes. Deals were arranged by armies of persuasive financiers who got big paydays.
Now, hundreds of cities and government agencies are facing economic turmoil. Far from being isolated examples, the Wisconsin schools and New York's subway system are among the many players in a financial fiasco that has ricocheted worldwide.
The bank at the center of their saga, named DEPFA, is now in trouble. The Wisconsin schools are on the brink of losing their money, confronting educators with possible budget cuts. Interest rates for New York's subways are skyrocketing and contributing to budget woes that have transportation officials considering higher fares and delaying long-planned track repairs.
The bank's problems have threatened the stability of its parent company in Munich, forcing German officials to intervene with a multibillion-dollar bailout to stop a chain reaction that could freeze Germany's economic system.
"I am really worried," said Becky Velvikis, a first-grade teacher at Grewenow Elementary in Kenosha, Wis., one of the districts that invested in Noack's deal. "If millions of dollars are gone, what happens to my retirement? Or the construction paper and pencils and supplies we need to teach?"
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