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

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

Whitefish Bay and the other school districts got something substantial too: nearly all of the risk. The school districts are about to lose all of their initial $37.3 million. They will also lose another $165 million of the money they’d borrowed from Depfa. As soon as the default rate is reached, $200 million will go to pay insurance claims to the Royal Bank of Canada. And the schools still will owe the full $165-million Depfa loan, and they will still owe on the bonds they had issued to raise much of their $37.3 million in collateral. The risk of reaching total default currently is so high that Kenosha’s entire piece of the CDO investment ($35.6 million) was valued at only $925,000, as of January 29, 2009—a decline in value of $36,575,000. Now the school districts are paying hefty fees not just to bankers but also to lawyers, as they sue to unwind the deal and recover damages.

“This is something I’ll regret until the day I die,” said Shawn Yde of the Whitefish Bay schools.

He’s not alone. As National Public Radio and the New York Times reported in a joint article, “Wisconsin schools were not the only ones to jump into such complicated financial products. More than $1.2 trillion of CDOs have been sold to buyers of all kinds since 2005—including many cities and government agencies. . . .”

Did these public agencies deserve any protections? A prudent rule might be to forbid investment houses to peddle such risky securities within a thousand yards of a school district. But there are no rules, since these “exotic and opaque” financial securities are still entirely unregulated. (When the Kenosha Teachers Association discovered that the securities peddled to the school districts were identical to those that sunk AIG, it requested that the Federal Reserve remove them from the school districts just as they have done for AIG—an eminently fair and reasonable request in my opinion. See chapter 8 for more on AIG.)

Whitefish Bay, Kenosha, and the other three districts made missteps and miscalculations. They were naive. As Mark Hujik candidly said, they saw a pot of gold on Wall Street and wanted their piece. But they were had. We all were. We know that something has gone terribly wrong not just in Whitefish Bay but with our entire economy. There’s a connection between the junk that was peddled to the “Wisconsin Five” and the crash of the global financial system. In fact, if we can understand exactly what David Noack sold to Whitefish Bay and why, we will also understand how the economy collapsed, and what needs to change to prevent this from happening again.

Our trail will lead to an examination of financial booms and busts, including the Great Depression. And those of us with strong stomachs will also learn more than we ever wanted to know about CDOs, CDOs-squared, synthetic CDOs, and credit default swaps—those exotic instruments that swamped Whitefish Bay.

Along the way, we will see how bankers, traders, and salespeople pocketed hundreds of millions of dollars by selling risk all over the world as if it were a collection of predictable Swiss watches. And we’ll puzzle over why Alan Greenspan, Robert Rubin, and Ben Bernanke fought so hard to keep these dangerous financial instruments unregulated.

We’ll tackle the “logic” of free marketeers who claim that the meltdown is the fault of low-income homebuyers who got in over their heads. We’ll also marvel at how, in response to the financial meltdown, former treasury secretary Paulson and friends blew open the U.S. Treasury vault so that Wall Street could walk off with a trillion dollars . . . and counting.

And once we’ve put all the puzzle pieces together, we’ll use our new understanding to formulate reforms that might protect us from the fantasy-finance fiasco that is harming not just Wisconsin and the rest of America, but the whole world.

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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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