LIANE HANSEN, host:

A story in the New York Times today 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, and much more. We're joined by New York Times reporter Charles Duhigg and NPR's Adam Davidson who have been working on this story. Charles, can I start with you because you came up with the idea. Sketch it out briefly for us.

Mr. CHARLES DUHIGG (Reporter, New York Times): Thanks, Liane. This is a story that starts in Wisconsin with some school districts that bought what they thought at the time was a collection of bonds. It turns out they were wrong. This was a collection of what we now know are some of the most toxic assets in the economy. But this purchase in Wisconsin set off a chain reaction that eventually moved to Ireland and Germany and then back to the United States to New York, Colorado, and California. And it's had these worldwide ramifications.

ADAM DAVIDSON: And Liane, this is Adam. If we start with that first step in the chain, these five school districts in the southeast corner of Wisconsin, these were school boards trying to solve a small financial problem by making these investments. And what they'll now tell you is that they really didn't understand what they were buying at all. Here's Marc Hujik. He's a school board member in Kenosha, Wisconsin.

Mr. MARC HUJIK (School Board Member, Kenosha, Wisconsin): Unfortunately, what we thought we bought and what we bought are two separate things. And the information we were provided prior, when we asked questions and received answers, weren't necessarily reality or the truth.

HANSEN: So, Charles, what were they buying?

Mr. DUHIGG: They were buying something that school boards should never actually be buying. It's called a synthetic CDO. Basically, they sold insurance on a big collection of bonds which put them on the hook if anything went bad, but they didn't know that.

DAVIDSON: Liane, this is Adam again. They were confused, I think it's safe to say. They just thought they were buying these regular old safe bonds. And this particular asset that they bought came with a prospectus that was three inches thick. Shawn Yde in Whitefish Bay actually measured it.

Mr. SHAWN YDE (Director of Business Services, Whitefish Bay School District): As a matter of fact, the document itself was so big that it didn't fit on the shelf that I had. I actually have had it on the floor of my office for the last two years.

DAVIDSON: You know, he shouldn't feel too bad for not understanding these things. These are the types of investments that brought down some of the most sophisticated banks and companies in New York. The Wisconsin school districts were a little bit helpless.

HANSEN: Well, Charles, you said that this caused a chain reaction and spread around the world. How did that happen?

Mr. DUHIGG: Well, the school boards had borrowed about $165 million from a small Irish bank named DEPFA. DEPFA was actually a German bank that had moved to Ireland to save taxes. And then in the early 2000s, it spread all around the world.

DAVIDSON: I had a talk this week with the retired head of the New York office of DEPFA. His name is Herb Jacobs. And he is almost, I feel, like a tragic figure. He is so proud of what he accomplished, because from 2003 to earlier this year he helped spearhead this small Irish bank's explosion from nothing in the U.S. into one of the central pillars of municipal finance of the U.S. municipal bond world.

Mr. HERB JACOBS (Former Managing Director, DEPFA, New York): Yeah, it was very exciting. It was one of the great occupational moments in my career. And we shared in the success with a great deal of pride and accomplishment. So I don't think any us envisioned that this would become a wholesale slaughter that it eventually did become.

HANSEN: What is he talking about when he says wholesale slaughter?

Mr. DUHIGG: He's talking about how it spread from Ireland to Germany and then back to the United States. DEPFA, that's the small Irish bank that's actually a German bank, it had made so many bad deals. And when all the big U.S. banks started collapsing, DEPFA had started to collapse too. And that set off a crisis at DEPFA's parent company in Germany. It's a company named Hypo Real Estate. It's a big bank. German officials were so worried about a complete meltdown of the German economy because Hypo Real Estate was melting down that they had to pump $75 billion into all of these banks.

DAVIDSON: And that's the moment, Liane, when the crisis in Ireland and Germany that was started by things in the U.S. comes back to the U.S., because DEPFA growing so fast had become a crucial part of how cities and counties and school districts and park districts fund themselves. DEPFA had created a series of products that allowed cities and counties and municipalities to get bonds cheaper, basically to borrow more cheaply. And when DEPFA all but exploded, you have all sorts of municipalities in the U.S. having to spend a lot more money to borrow money. So Charles found out that the MTA in New York, the people who run our buses and subways, are having to pay millions more. I mean, Charles and I are probably going to have to pay more every time we go on the subway because of DEPFA's explosion.

HANSEN: And this isn't affecting just New York, right?

DAVIDSON: Not at all. Affordable housing in Colorado, in California. There's a bridge project in Vancouver that's in trouble. There are dozens, maybe hundreds of municipal projects that are links to DEPFA that are now in trouble because of this weird economic international blowup.

HANSEN: You know, but Charles, explain. Is there an actual bad guy in this story?

Mr. DUHIGG: You know, I would have to say that the villain is probably ignorance and the exuberance that drew cities and school districts and regular people into this big economic global system when they didn't really understand how it worked.

DAVIDSON: And I think there is a tragedy here too, which is over the last 30 years there's been a series of financial innovations that have just been plain good. They have allowed city governments, local governments to get money more cheaply, which means more hospitals, more schools, better sewers, you know, basic, good public service. And that whole system may be permanently broken by this crisis. And that means that really for the foreseeable future, it's - there's just going to be less public service in the U.S.

HANSEN: That's NPR's Adam Davidson, and he was joined by New York Times reporter Charles Duhigg. The print version of this story is on the front page of The New York Times today. There will be more on Morning Edition on Tuesday and All Things Considered this coming Friday. You can also learn more about this story at Planet Money's blog and podcast at npr.org/money.

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