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To: shades who wrote (67253)	8/7/2007 7:00:53 AM
From: TobagoJack	Read Replies (1) \| Respond to of 116555

the municipal education budget went to the usual place ... wall street bloomberg.com Bible School Lawsuit Tells Typical, Sad Swaps Tale: Joe Mysak By Joe Mysak The Bank of America building, in Chicago Aug. 7 (Bloomberg) -- A California Bible school sued its bankers on July 31 for fraud in connection with swaps, and you have to wonder how many other municipalities can say what the school said in its lawsuit. We did everything they told us to. They negotiated all the terms on our behalf. They assured us they were representing our best interests. We relied on them to get everything right. We didn't know what we were doing. What a sad, and undoubtedly typical, litany. There are thousands of municipalities out there. How many can say they truly understand how the municipal market works, one that enables them to borrow what will probably be a record $400 billion-plus this year? How many of them really know what they are doing? It's not as though it's getting any easier to understand this business, either. Interest-rate swaps are among the most aggressively pitched things in the municipal market right now, and most municipalities haven't a clue as to how they work or if they are paying the right price for them. As the school says, its bankers knew very well that the school ``had neither the data feeds, modeling system nor resources required to determine whether the swap rates it received were on-market.'' IRS Audit Paying the right price is of more than academic interest in the municipal market, because issuers of tax-exempt debt have to jump a lot of tax-law hurdles. If they don't do it just right, if they pay too much for one aspect of the transaction, that can have an effect on everything else. If the Internal Revenue Service happens to audit the bond issue, the municipality could be stuck paying a penalty to keep the bonds tax-exempt. This is what happened to the Bible school -- Biola University of La Mirada, California, founded in 1908 as the Bible Institute of Los Angeles. If the IRS hadn't come in and declared the school's bonds taxable, the school wouldn't have examined the financings it did in 2002 and 2004 at all. The banks, Bank of America Corp., Banc of America Securities and BNP Paribas SA (the counterparty on the swaps), have declined to comment on the suit. There is a wrinkle here: Bank of America in February announced it entered into a ``leniency agreement'' with the U.S. Justice Department. In exchange for cooperating with the government's massive investigation into municipal market swaps, which came to light last November, the bank gets immunity from criminal prosecution. `Undisclosed Payments' I don't know how they are going to explain this to a jury. In its complaint, the school says it paid too much for its swap. The swap provider, BNP Paribas, then secretly passed on the excessive markups back to Bank of America through a ``mirror swap transaction.'' The bank paid BNP a kickback of $2.58 million, which it called ``upfront fees,'' and was able to make so much money on the swap that it also made ``undisclosed payments to others who had no apparent role in the financings.'' I have a feeling we will be hearing a lot more about ``mirror swap transactions'' and ``upfront fees'' in the days to come, as well as why it's probably not a good idea to have one firm, through its various subsidiaries (in this case, Bank of America), as your underwriter, your financial adviser and your swaps adviser. And what about those other parties, who were paid even though they had no apparent roles in the financings? Get the Deal Done Clearly, the Bible school got involved in a game it didn't understand. The same can be said for most of the municipalities who are engaging in swaps transactions in connection with their bond deals right now and for the past decade or more. Perhaps the big federal investigation into this game will lay out precisely how it all works. We can only hope. There are many poignant parts to this lawsuit. I will mention only two. In December 2001, shortly before it embarked on these financings, one of Bank of America's bankers referred to Biola as a ``loyal client and an old friend.'' The relationship went back more than 20 years, the school says. The school thought it had a ``special relationship of trust'' with the bank. Then there's the little matter of the bank's March 12, 2004, memorandum, which advised Biola to avoid interest-rate risk and get the deal done now! The next paragraph of the complaint is almost tragic: ``Contrary to the March 2004 Memorandum, Biola would have received more favorable financing terms had it waited 18 months, and the predictions regarding the direction of interest rates over the next 18 months was materially misleading, reckless, and without a sound basis.'' Wouldn't it be interesting if issuers everywhere went back and examined financings that they had been stampeded into? The Securities and Exchange Commission has asked the U.S. Congress to reform the municipal market. Can someone, please, save municipal-bond issuers from themselves? To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net Last Updated: August 7, 2007 00:02 EDT