If only it were Tim Geithner or Barack Obama referring to some of our Bigger Problems, but here’s Dave Cieslewicz telling the Overture Center’s lenders to cuss off:
The banks “should take a very short haircut on this,” he says, referring to the swap agreements. “They took tens of millions in interest and fees over the life of the deal. They did very well.”
Kristin Czubkowski explains at the Cap Times* why the City thinks it’s off the hook for its guarantees of Overture debt, a question that was raised in our last visit to the subject. Turns out that the geniuses who ran Overture’s finances are no smarter than (indeed slightly dumber than) Larry Summers of the Harvard presidency era: they entered into interest rate swaps which now, with rates in the basement for the foreseeable future, have added millions of dollars to the guarantors’ annual obligations relative to the “worst case” scenarios as of the Center’s refinancing. The “slightly dumber” part is that nobody here’s been willing to pay to exit the swaps.
Czubkowski hands us over to the city attorney for an explanation of why the city thinks it’s off the hook even for the $1.95 million anticipated in the refinancing, let alone the $5 million plus including the swap payments:
[City Attorney Michael] May and Cieslewicz … say the decision to draw the swap payments from the firewall violates the original contract and the city’s agreement to back some of the Overture Center loan.
The rule in Wisconsin “is that a person who is owed the money cannot change the deal and hold the guarantor to their agreement without getting the guarantor to sign onto the changes,” May told the city’s Board of Estimates Monday night. “The rule is so strong that if they make the change and it increases our risk, that it releases any obligation” to pay even the previously agreed-to amount.
As a non-lawyer, I can’t evaluate the validity of this opinion. As an economist, the rule May is describing would be a very good idea in the event it isn’t true: it’s saying that signing someone up to cover losses on bet A doesn’t automatically obligate them to cover the losses on bet B, which certainly would tend to avoid a lot of obvious opportunities for mayhem.
Still, there may be a contract-law question underlying this: what exactly did the city agree to? It’s not that the world doesn’t have contracts whose terms can be altered unilaterally — credit card agreements being a notorious example, though even there the notionally agreed-upon original terms expressly allowed modifications. Plus, those involve notice and opportunity (though not necessarily a costless opportunity) to decline the revised deals, we can only assume because even contract law is not such an ass as to let people define others’ obligations with total impunity. So perhaps someone could obtain the actual agreement and run it past a real lawyer for comment.
* A nit to pick being that in describing the Overture trust concept, Czubkowski blames the trust’s problems on the “turbulent post-2005 stock market.” In fact, the fund’s problem was that it wasn’t invested in a period when any moron (like me, with my 401(k)) could have (and did) make loads of money; it was holding more than 60% cash, plus 30% stocks and 10% Bernie Madoff, back in 2006 with a targeted return of 8.25% to meet all obligations.