ROBERT SIEGEL, host:
From NPR News, this is All Things Considered. I'm Robert Siegel.
MICHELE NORRIS, host:
And I'm Michele Norris. There's a popular set of children's books called, "A Series of Unfortunate Events." The books are about the adventures of three orphans and in these books basically nothing good ever happens to them. In this half hour, we're going to tell you three intertwined tales from the global financial world, and also in these tales nothing good ever happens. But in the end, we are all a bit wiser.
SIEGEL: The reports you're about to hear are part of a collaboration between NPR's Planet Money team and the New York Times. Our stories make stops in Ireland, Germany and the Cayman Islands. We begin with NPR's David Kestenbaum on a high school football field in Kenosha, Wisconsin.
(Soundbite of whistle)
Mr. MARK HUJIK (Offensive Coach, Tremper Trojans): Hey, 189, 189.
DAVID KESTENBAUM: Mark Hujik is the offensive coach for the Tremper Trojans. In addition to calling the plays, he is partly responsible for the bleachers, the classrooms, the teachers and funding for that brick high school nearby, because he's on the school board. And these days when he's out in, say, the grocery store, people ask not about the football team, but about that other thing - the investment the school board made. Which he explains like this.
Mr. HUJIK: Regarding our transaction, um, unfortunately, what we thought we bought and what we bought are two separate things, and consequently we have an asset that is valued at a great deal less than it was originally.
KESTENBAUM: The school board invested $37.5 million. At last check, they had lost over 90 percent of that. That's not the worst part, that $37.5 million they invested, all of it borrowed money. In fact, four nearby school districts went along, investing a grand total of $200 million, most of it borrowed. How did the schools get wrapped up in this? This is the sort of situation where you wish the school boards had taped their meetings. And actually, they did.
(Soundbite of recorded board meeting)
Unidentified Man: On page three it starts explaining what it is.
KESTENBAUM: This is pitch by a broker to one of the school boards in 2006. And listening back, it seems like the most boring thing in the world. Even though if this were a horror movie, it's where the scary music would start creeping in. The school boards were trying to build up a little pool of money to help pay for health care for teachers and employees when they retire. The deal, as the school boards now say they understood things, was that the districts would borrow money at a low interest rate, then reinvest that borrowed money in very safe corporate bonds through a fancy financial instrument.
Unidentified Man: This product is a - I call it a black box.
KESTENBAUM: They were basically acting like a bank. You borrow money at one rate, lend it out with a slightly higher rate, the difference you keep. In this case, they were only going to make one percent, which is why the schools borrowed all that money to magnify their returns. For the $200 million invested they could expect something like a steady two million a year in income. Mark Hujik, the football coach, used to work at an investment bank in New York. He says the guy selling the thing either didn't know what he was talking about or just misled them.
Mr. HUJIK: For me personally, I'd say it's a very embarrassing moment. You know, I'd take, you know, I do this because I want to help my community. And you know, on my watch, we did something that turns out to be very foolish.
KESTENBAUM: It turns out the school districts had bought one of the most complex financial instruments ever constructed. Something called a synthetic collateralized debt obligation. The first guy to understand the depth of what that meant works at a high school about 40 miles north.
Mr. SHAWN YDE (Director of Business Services, Whitefish Bay, Wisconsin): Hello. My name is Shawn Yde. I'm the director of business services for the school district Whitefish Bay.
KESTENBAUM: Yde used to be a wrestler and he has the look of someone who just got pinned. A synthetic collateralized debt obligation is not actually so hard to describe. But the paperwork for it is intense. Whoa, that's a huge book.
Mr. YDE: Yes. This is the closing document.
KESTENBAUM: It's over three inches thick. We measured it. Did this thing actually come in the mail?
Mr. YDE: Yes, it did. Or they - they dropped it off by courier.
KESTENBAUM: And then it just went on the shelf over there?
Mr. YDE: Actually, it's too big to fit in the shelf so it was - it's been on my floor since.
KESTENBAUM: Like many things in the financial crisis, this document is global. The CDO is constructed by the Royal Bank of Canada. It was registered in the Cayman Islands. Parts of the investment were managed by bankers in London. All that money the district's borrowed, mostly from a foreign bank. The black box works for a while, spitting out money. But then, Yde started getting some strange phone calls and faxes. The value of their investment was not steady like bonds would be. It was jumping around and no one could tell them why.
Mr. YDE: We googled stuff. We actually went on Standard and Poor's Web site, read a lot - more than you'd ever want to know about these complex transactions.
KESTENBAUM: Eventually they got a lawyer and hired a firm to go over that huge document. The moment of truth came, he said, across the hall in the superintendent's office where a financial expert explained that they did not own any corporate bonds. Instead, the school boards had been in the insurance business. They had been insuring part of a pool of over 100 bonds. If the bonds were doing OK, no problem. But if just eight companies in that pool defaulted, the school would lose all of its money.
Mr. YDE: My heart just sunk. I mean, it's one of those - one of those times where you just - absolutely got sick, and I'm just sick to my stomach listening.
KESTENBAUM: The book Yde keeps on his floor has a list of the companies in the pool. They're all big names.
Mr. YDE: Ambak, Anheuser-Busch, AT&T.
KESTENBAUM: Which explains why the CDO they bought had been rated double A minus by S&P. Historically, it was really rare for any of these companies to default on their bonds. If you were selling insurance on their bonds, it was just not that big of a risk. It's chilling to look through that book today though. There are companies in there that now conjure up completely different images than they must have when these pages were printed out: Lehman Brothers, AIG, Fannie Mae and Freddie Mac. So far, not enough companies in the pool have defaulted for the schools to actually lose all their money. But the CDO is now worth very little, because the market thinks it's likely more of the companies could run into trouble. So Yde is in the awful spot of hoping, hoping, hoping that just does not happen. That they do not go over the cliff. It's the difference between being OK and losing everything. Yde has photos of his kids on the wall, six boys, all wrestlers.
Mr. YDE: My two youngest read an article in the paper that was calling, you know, these empty-headed people who invested in this should be fired and that type of thing and, you know that's - it breaks my heart, I swear to you. Kind of get choked up but.
KESTENBAUM: Yde's eyes get damp when he says this. And just when I'm about to leave, his secretary hands him an envelope which he opens and stares at.
Mr. YDE: This is a bankruptcy credit event notice on Washington Mutual.
KESTENBAUM: So, what does that mean?
Mr. YDE: That means that we're one - one default closer to falling off that cliff.
KESTENBAUM: The school districts have filed a lawsuit against the broker and the Canadian bank that set up the deal. The broker and the bank say the school board had been informed of the risks and that, like a lot of investments that seemed safe, this one has unfortunately lost a lot of money. So, I just left Shawn Yde's office at the high school here in Whitefish Bay, Wisconsin.
(Soundbite of car door closing)
KESTENBAUM: Just getting in the car. And on Shawn Yde's desk, he'd written a list of things to do. And number one on that list was, call DEPFA. Now DEPFA is the bank that lent these school districts $165 million for this investment. It's not a local bank. It's not even a US bank. It's an Irish bank and that is the next chapter in our story.
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