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

By Les Leopold, Chelsea Green Publishing. Posted June 3, 2009.

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.

To take the edge off the enormity of the investment Noack was pushing, he ended his pitch by asking the school board to pass resolutions to “authorize but not obligate” its financial committee or officials to make the investment if and when the rates seemed favorable. He never asked the boards to make a final commitment then and there. Instead, he conveyed the sense that even after the vote, they weren’t committed to anything.

But the seduced are rarely passive. In this affair, several key board members helped the process along. On the Kenosha video­tapes, for example, one board member, Mark Hujik, a hulking, ex–Wall Street player who now owns a Wisconsin financial advisory service, repeatedly sealed the deals. The self-confident Hujik never asked a question he didn’t already know the answer to. He made sure everyone knew that he knew the ins and outs of finance. At a key meeting before Kenosha signed on to its first deal, he stressed that the tens of millions in loans the board would be taking out were “moral” but not “contractual” obligations on behalf of the town. He implied that if things went wrong, the town really wasn’t on the hook for $28.5 million in loans. (Unfortunately, he didn’t mention that the town could still be successfully sued and see its debt ratings plummet if it defaulted on its “moral” financial obligations. And when a town’s debt rating falls, it faces higher interest rates for all its other borrowing needs, assuming anyone will ever lend to it again.)

Together, Hujik and Noack wooed the parties with intimate bankerspeak that conveyed confidence and expertise. They whispered financial sweet nothings: LIBOR rates, basis points, spreads, mark to market, cost of issuance, static and managed investments, arbitrage, tranches, letters of credit, collateralization ratios, and standby-note purchase agreements. After a while the board members started using the same language. Words like “million” and “dollars” disappeared from their vocabulary; instead they referred familiarly to “twenty” and “thirty” (as in thirty million dollars). Perhaps the slang and technical lingo distracted the officials from the risky nature of their financial decisions. They whispered financial sweet nothings: LIBOR rates, basis points, spreads, mark to market, cost of issuance, static and managed investments, arbitrage, tranches, letters of credit, collateralization ratios, and standby-note purchase agreements. After a while the board members started using the same language. Words like “million” and “dollars” disappeared from their vocabulary; instead they referred familiarly to “twenty” and “thirty” (as in thirty million dollars).

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Les Leopold is the executive director of the Labor Institute and Public Health Institute in New York, and author of The Looting of America (Chelsea Green Publishing, 2009).

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