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The Looting of America: How Wall Street Fleeced Millions from Wisconsin Schools

Wall Street investment houses went after the $100 billion saved in school-district trust funds like Whitefish Bay's, and made a killing.

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As a national firm based in St. Louis, Stifel Nicolaus was fortunate to be represented in Milwaukee by David W. Noack. According to the New York Times, “He had been advising Wisconsin school boards for two decades, helping them borrow for new gymnasiums and classrooms. His father had taught at an area high school for 47 years. All six of his children attended Milwaukee schools.” School boards repeatedly referred to him as their “financial advisor”—a label he never refuted.

In 2006, Mr. Noack, an avuncular, low-key salesman (he preferred to be called a banker), urged the Whitefish school board and others in Wisconsin to buy securities that offered higher returns than treasury notes but were just about as safe. He had recently attended a two-hour training session on these new financial products, so he was confident when he assured the officials that they were “safe double-A, triple-A-type investments.” None of the investments included subprime debt, he said. And the deal conformed to state statutes, so the district would be erring on the conservative side. In fact, Noack said, the risk was so low that there would have to be “15 Enrons” before the district would be affected. For the schools to lose their investment, “out of the top eight hundred companies in the world, one hundred would have to go under.”

As in many romances, one party seduces and the other is seduced. Noack certainly came across as a caring, considerate suitor. He started his sales drive by inviting area school administrators and board members to tea, “with food and beverage provided by Stifel Nicolaus,” making the gathering seem more like a PTA fund-raiser than a high-powered investment pitch. He merely wanted to introduce the local officials to these new “AA-AAA” investments, as the invitation pointed out.

In a series of video- and audiotapes recorded by the Kenosha school board—which later joined forces with Whitefish Bay and three other nearby school districts to invest with Noack—you could discern a pattern to his pitch. First he would stress the enormity of the financial problems the school districts faced in meeting their long-term retiree liabilities. For example, during a seventeen-minute spiel recorded on July 24, 2006, he reminded school board members that, based on Stifel’s actuarial computations, the district had an $80-million post-retiree liability. (In an “updated” Stifel study presented a year later, the estimate rose to $240 million.) In fact, Noack spent much more time describing the extent of the liability and how the district would have to account for it than he did explaining his proposed multimillion dollar investments and loans. Not to worry. He said that he had “spent the past four years” developing investment solutions for such liability problems.

Next Noack stressed that he was not about to take unacceptable risks with the schools’ money. His recommended investments were extremely conservative, his approach cautious. As he put it in the July meeting, “our program ... is using the trust to a certain degree [and] a small portion of the district’s contribution, investing the money, making the spread in double-A, triple-A investments and funding a little bit at a time over a long period of time ... and what we make is as risk-free as we can get. . . .”

He also nudged the school district along with a bit of peer-group pressure, describing how other Wisconsin districts were working with him on similar investments. There was power in numbers, he told them. By working together with other districts, they would “increase their purchasing power,” a phrase he repeated many times.

Noack made it seem as if the districts’ collective “purchasing power” had banks and investment houses lining up to compete for their business, offering them the lowest-cost loans and highest rates of return. He was soon going to be “bidding out” the districts’ packages and he was sure he was going to get them the best rates.

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