Auction-Rate Collapse Costs Taxpayers $1.65 Billion (Update3)
bloomberg.com
May 16 (Bloomberg) -- In 2003, the Culinary Institute of America outgrew a former Jesuit seminary building on its Hyde Park, New York, campus. So it asked Edward Shapoff, a Goldman Sachs Group Inc. banker on its finance committee, for advice on borrowing to pay for new housing and parking.
Shapoff recommended auction-rate bonds, securities that pay short-term interest rates yet don't come due for as long as 40 years.
``The advice seemed quite reasonable,'' said Charles O'Mara, the institute's chief financial officer, who arranged three auction-rate bond sales totaling $56.8 million.
For about three years, the school's weekly auctions cost the institute as little as 0.7 percent. Then, in September 2007, rates began to rise when investors saw auctions of other debt fail to attract buyers and they grew concerned that bond insurers might be laid low by the subprime-mortgage contagion. By Feb. 19, after dealers halted a two-decade practice of buying bonds that didn't sell at auctions, the institute's rate peaked at 14 percent. Over the next 12 weeks, it paid $561,000 more in interest than it had in the previous 12. |
