That fine print is where the heroes and zeros are made.

The Port Authority of New York and New Jersey negotiated variable-rate bond deals that ended up allowing interest rates to recently rise as high as 20 percent.

Nadia Sesay, director of the San Francisco Mayor's Office of Public Finance, is arguably one of the heroes of this story. She appears to have kept the city relatively unscathed in a couple of instances. On $264 million in debt issued to finance the construction of Moscone Center West and Laguna Honda Hospital, the city never saw interest rates go higher than 7 percent, and is now spending some $1.2 million to reissue new fixed-interest debt with a rate below 5 percent.

San Francisco's biggest bond market problem, however, is at the airport, where more than $1.2 billion in debt was reissued following the spring interest rate explosion. Airport officials refused to say how much this cost the city, but records obtained from regulators suggest officials may have been careless in protecting taxpayers from further risk. In attempting to smooth over its problem, the airport issued new variable-rate bonds covered by insurance from a company called Financial Security Assurance. But just two weeks after the airport issued these bonds May 1, Moody's said it would reassess the company's ratings after to worse-than-expected losses on mortgage bonds. Moody's will decide in September whether to downgrade Financial Security Assurance's credit rating. If it does, San Francisco will again be exposed to potentially millions of dollars in additional costs.


It isn't just giant airports affected by this market crisis. The California Treasurer's Office provided me with a list of 95 state agencies that have issued some $28 billion of auction-rate securities since 2000. That's only a fraction of debt affected by the meltdown. The treasurer's office told me it has no accounting of the total in California of variable-rate municipal bonds of the type issued by San Francisco.

Indeed, this crisis is so widespread and insidious that if you're a consumer, taxpayer, student, commuter, or patient, you're likely to be affected.

The San Francisco-based hospital chain Catholic Healthcare West, for example, recently obtained state approval to reissue some $2.2 billion in affected bonds. Stanford Hospitals and Clinics has been authorized to reissue $665 million. The East Bay Municipal Utilities District has issued more than half a billion dollars in affected bonds; the city of Gilroy, $45 million.

Another typical group of victims: students at USF. Reverberations from the February market meltdown have meant the university is paying hundreds of thousands of dollars more per year in expenses on its debt — about what it would cost to give 10 freshmen full-ride scholarships. "It's $400,000 less a year we'll spend on other things that are more important," says vice president for business and finance Charles Cross.

Like other global financial crises, this one has critics crying for investigations. Lawsuits in Connecticut and Los Angeles allege a Wall Street conspiracy to defraud issuers of municipal bonds. If these allegations are true, a full accounting could mean billions of dollars returned to the public's pockets.

If blundering public investment managers are bad for a bond issuer's financial health, colluding Wall Street hustlers are worse. E-mails recently released in connection with the Connecticut lawsuit suggest a conspiracy between ratings agencies and insurers to fraudulently compel municipalities to buy worthless insurance. According to the lawsuit complaints, ratings agencies falsely assigned weak credit ratings to cities while giving the highest possible rating to companies insuring hundreds of billions of dollars in mortgage-backed junk bonds. The result was unnecessarily high interest payments siphoned to investors from governments and nonprofits, and millions of dollars spent on faulty insurance policies.

A spokesman for Oakland's city attorney told me the office plans to file a similar lawsuit. "We're monitoring the cases closely," said Matt Dorsey, spokesman for San Francisco City Attorney Dennis Herrera, adding that there's no decision yet on whether San Francisco might follow Oakland's lead.

It seems apparent in hindsight that it was wrong to tell investors that cities such as San Francisco, host to the Pacific Rim's financial services industry, was more likely to default on its obligations than junk bond insurers.

If these cases are deemed to have merit, the list of potential plaintiffs could be pages long.

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