UC System has some highly questionable investments

by Brian Leubitz

During the bubble, many large institutions got a little greedy with their investments. They wanted lots of return, but no risk. And that’s what Wall Street was selling in some of their shadier business “growth areas.” One such shady areas of Wall Street was the interest rate swap market.  And the University of California system got sucked in:

Over the last decade, the UC Board of Regents has engaged in risky deals with Wall Street banks called interest rate swaps. Banks sold swaps to the university and other public institutions as insurance against rising interest rates on variable rate bonds. Under a swap agreement, borrowers such as the university paid a fixed rate to the bank in exchange for the bank paying the university a variable rate based on the markets’ interest rates for borrowing.

Now these swaps have turned out to be losing bets. UC is taking huge losses because interest rates plummeted following the financial crisis of 2008 – allegedly in part because of illegal manipulation by the same banks that sold the swaps – and have stayed at record lows. Swap deals already have cost UC nearly $57 million, with $200 million more in losses anticipated. Of the $250 million UC expects to receive from Prop. 30, some $10 million a year will go to swaps payments unless the deals are ended. (SF Chronicle Open Forum)

And some of the shadiness doesn’t even come from Wall Street on this deal. UC Leadership, including the regents and upper management, are riddled with Wall Street connections. And to this day, this is true. For example, Peter Taylor, UC’s CFO, was at Lehman and helped arrange some of the swaps.

Californians have entrusted UC leadership with both money and the education of California’s future leaders. It is about time they opened up to California about what is really going on in the books.