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Posts Tagged ‘Madison’

Look out for the one with the pom pom.

South Pinckney St., Madison, Wisconsin, Feb. 19, 2011

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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.

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The Wisconsin State Journal ran a front-pager by Dean Mosiman yesterday on plans being hatched in Mayor Dave’s office for a city take-over of the Overture Center, our absolutely fabulous but debt-ridden arts facility in Downtown Madison.  The state of affairs is the result of an arrangement whereby about half of the donation was put into a trust fund that was intended to pay off a construction loan and generate additional income to support center operations.  Unfortunately, as I pointed out at Old Marginal Utility, the fund was undercapitalized and so needed to produce roughly 9% annual returns to make ends meet.  Alas, the plan was hatched in the late 1990s when this probably seemed like the height of conservatism.  A late-2005 refinancing, strongly opposed by the Mayor, reduced the required return to about 8.25 percent, but was particularly susceptible to losses in the early years.  D’ohh.

A companion piece by Mosiman doesn’t shed a lot of light on the fund’s history, but in Old Marginal Utility days I took a close look at the trust fund’s investments on behalf of our alternative weekly, Isthmus, and declared them a mess:

The interesting question is why they stayed in cash for so long post-refinancing. Pardon me for thinking that the financial geniuses behind the refinancing might have had an investment plan ready to roll upon approval. None of the obvious answers — they didn’t have a plan, the Cash Era represents an inept plan, and they chose a deliberately defensive position to avoid the political embarrassment of a quick I-told-you-so from refinancing opponents — is confidence-inspiring.

As it happened, the fund did get out of cash and into alternative investments, one of the biggest of which was the Fairfield Sentry fund.  That fund turned out to be the most consistent producer of returns.  While in April of ’08 I declared it a black box, we now know that the box was Bernie Madoff’s Ponzi scheme; had the Overture trust performed slightly better and not been liquidated in the Fall of ’08 in advance of the Madoff debacle, the refinancing scheme would have suffered an even worse collapse as nearly 20% of the trust was with Madoff via Fairfield.

I can only imagine what the crazies are saying in the madison.com comments section, but settling the remaining construction debt and turning the center over to the city is not exactly radical under the circumstances — indeed, it’s more-or-less the path not taken when the 2005 refinancing was being considered.  The City doesn’t (or, at least, shouldn’t) want a prime downtown block going dark, the center’s lenders would surely be out more than the $6 million or so cramdown that the city is looking to stick them with if they foreclosed*, and the major donor wants to limit his personal liability.  A screaming headline in the paper’s opinion section expresses strong support for a plan to redevelop the threadbare Edgewater hotel on Lake Mendota with a city subsidy of $16 million, but if resources are finite, then Overture would use of public money of a similar magnitude to the benefit of a much larger constituency.

* An interesting, and for now under-reported, part of the story is that the city claims that changes to the loan agreements when the trust was liquidated in 2008 let it off the hook for the portion of Overture debt payments it had guaranteed in the 2005 refinancing.

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I am, as a rule, a fast-moving Lycra-clad bike commuter. I didn’t start out that way, but as Sammy Hagar might have sung under different circumstances, I can’t ride 12.5. At least, I discovered that it takes surprisingly great effort to limit my speeds to the point where hypothetical work clothes wouldn’t be drenched in sweat upon arrival at work. So I’ve viewed it as a basically practical adaptation to arrive at work a mess and use the provided facilities — my office had a changing room with a shower long before you could get a LEED point for it — to make myself decent. The arrangement saves me time, thanks to averted boring trips to the gym, and money. What’s not to like?

Then came Mayor Dave Cieslewicz’s The Problem With Lycra, suggesting that the cyclist “dress code” and road-bike fetishism inhibits bike commuting in the U.S., as compared to Europe where everyone rides upright bikes in their civvies. Funny, I thought the far bigger obstacles were streets that are under-maintained or given over to cars from curb-to-curb (or both), and healthy fear of the typical SUV driver, barreling along as s/he does with a cell phone in one hand and a latte in the other.

One thing that’s for sure is that Sister Souljah moments kind-of suck if you’re in the Sister Souljah position. In a different context, Amanda Marcotte makes a case, which I highly endorse, that this liberal tic is worse-than-useless:

The intention of these sentences may have been to lay fears to rest, but the result is reinforcement of the idea that “foodieness” is some wicked elitist hobby. In an attempt to reassure people that merely liking to cook doesn’t make you a bad person, the writer reinforced the idea that there’s something morally suspect about most people who like cooking. In an essay aimed at convincing people that cooking well isn’t actually that hard, this sort of rhetoric undermines the point…

I don’t know when it was that everyone in our culture universally agreed that there was something shameful about having good taste and good sense, but nowadays if you want to defend either good taste or good sense, you often feel like you have to set up disclaimers about how you’re not one of Those People, the ones that think these things matter.

Nevertheless, I had the opportunity earlier in the week to rejoin the slow-cycling movement. The choice was to hop on in work-suitable duds midday (after Suzanne and I returned home from a lunch for one of our preferred charities) or drive to the office, so I hopped. I confess that the experience points to a better world, one in which 10 minutes on a bike pedaled at a not-brisk pace gets anyone just about anywhere anyone would want to go. Under those circumstances, I’d aver — pace Mayor Dave — that the Europeans have it right in largely ditching bike helmets, as there’s only so much damage that can be suffered at such speeds provided the damned SUVs are kept at bay.

I’ll still take the long way and the accompanying exercise most days, thanks, but going slowly and still getting places quickly felt like a luxury. It shouldn’t be.

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