Wis. School Investment Has Worldwide Implications

Ashley Gilbertson/NPR/New York Times

School board member Mark Hujik, owner of an asset management firm and football coach in Kenosha, Wis.

A story in The New York Times on Sunday, co-reported by NPR's global economics unit, Planet Money, examines how the financial crisis links some school districts in Wisconsin with banks in Europe.

In 2006, the school districts thought they were buying some of the safest bonds in the world, but in fact what they purchased were "toxic assets," or collateralized debt obligations, Charles Duhigg, the Times reporter who wrote the article, tells NPR's Liane Hansen.

Collateralized debt obligations, or CDOs, a centerpiece of the current financial crisis, are complex portfolios of diverse fixed-income assets in which buyers can invest their money.

"Unfortunately, what we thought we bought and what we bought … weren't necessarily reality or the truth," says Marc Hujik, a school board member in Kenosha, Wis.

The school board borrowed $165 million from Depfa, a small Irish bank, to buy the bonds. Depfa, which was actually a German bank that moved to Ireland to save money on taxes, made so many bad deals to U.S. institutions, Duhigg says, that when the big U.S. banks were collapsing, Depfa also started to fail.

That set off a crisis at Depfa's parent company in Germany, Hypo Real Estate Group, and German officials worried about a complete meltdown of the German economy, Duhigg says. So the German government had to pump $75 billion into these banks, which all but put Depfa out of its core business — helping cities, counties and school districts all over the world get cheaper loans.

One of the institutions that is closely connected with Depfa's financing is the New York Metropolitan Transit Authority. With Depfa and world money lenders now in trouble, the MTA will now have to pay millions more to borrow money for projects, with costs likely to be passed on to mass transit riders.

Depfa's reach goes far beyond Wisconsin and New York City. Dozens, perhaps hundreds, of municipal projects across the continent — including affordable housing in Colorado and California, and a bridge project in Vancouver — are linked to Depfa and are now in trouble.