Swimming with the Sharks: Goldman Sachs, School Districts, and Capital Appreciation Bonds

The fliers touted new ballfields, science labs and modern classrooms. They didn’t mention the crushing debt or the investment bank that stood to make millions. 

                       — Melody Peterson, Orange County Register, February 15, 2013  

Remember when Goldman Sachs – dubbed by Matt Taibbi the Vampire Squidsold derivatives to Greece so the government could conceal its debt, then bet against that debt, driving it up? It seems that the ubiquitous investment bank has also put the squeeze on California and its school districts. Not that Goldman was alone in this; but the unscrupulous practices of the bank once called the undisputed king of the municipal bond business epitomize the culture of greed that has ensnared students and future generations in unrepayable debt.

In 2008, after collecting millions of dollars in fees to help California sell its bonds, Goldman urged its bigger clients to place investment bets against those bonds, in order to profit from a financial crisis that was sparked in the first place by irresponsible Wall Street speculation. Alarmed California officials warned that these short sales would jeopardize the state’s bond rating and drive up interest rates. But that result also served Goldman, which had sold credit default swaps on the bonds, since the price of the swaps rose along with the risk of default.

In 2009, the lenders’ lobbying group than proposed and promoted AB1388, a California bill eliminating the debt ceiling requirement on long-term debt for school districts. After it passed, bankers traveled all over the state pushing something called “capital appreciation bonds” (CABs) as a tool to vault over legal debt limits. (Think Greece again.) Also called payday loans for school districts, CABs have now been issued by more than 400 California districts, some with repayment obligations of up to 20 times the principal advanced (or 2000%).

The controversial bonds came under increased scrutiny in August 2012, following a report that San Diego County’s Poway Unified would have to pay $982 million for a $105 million CAB it issued. Goldman Sachs made $1.6 million on a single capital appreciation deal with the San Diego Unified School District.

Green Light to Exploit

In a September 2013 op-ed in SFGate.com called “School Bonds Are a Wall Street Scam,” attorney Nanci Nishimura wrote:

. . . AB1388, signed by then-Gov. Arnold Schwarzenegger in 2009, [gave] banks the green light to lure California school boards into issuing bonds to raise quick money to build schools.

Unlike conventional bonds that have to be paid off on a regular basis, the bonds approved in AB1388 relaxed regulatory safeguards and allowed them to be paid back 25 to 40 years in the future. The problem is that from the time the bonds are issued until payment is due, interest accrues and compounds at exorbitant rates, requiring a balloon payment in the millions of dollars. . . .

Wall Street exploited the school boards’ lack of business acumen and proposed the bonds as blank checks written against taxpayers’ pocketbooks. One school administrator described a Wall Street meeting to discuss the system as like “swimming with the big sharks.”

Wall Street has preyed on these school boards because of the millions of dollars in commissions. Banks, financial advisers and credit rating firms have billed California public entities almost $400 million since 2007. [State Treasurer] Lockyer described this as “part of the ‘new’ Wall Street,” which “has done this kind of thing on the private investor side for years, then the housing market and now its public entities.”

Gullible school districts agreed to these payday-like loans because they needed the facilities, the voters would not agree to higher taxes, and state educational funding was exhausted. School districts wound up sporting shiny new gymnasiums and auditoriums while they were cutting back on teachers and increasing classroom sizes. (AB1388 covers only long-term capital improvements, not daily operating expenses.) The folly of the bonds was reminiscent of those boondoggles pushed on Third World countries by the World Bank and IMF, trapping them under a mountain of debt that continued to compound decades later.

The Federal Reserve could have made virtually-interest-free loans available to local governments, as it did for banks. But the Fed (whose twelve branches are 100% owned by private banks) declined. As noted by Cate Long on Reuters:

The Fed has said that it will not buy muni bonds or lend directly to states or municipal issuers. But be sure if yields rise high enough Merrill Lynch, Goldman Sachs and JP Morgan will be standing ready to “save” these issuers. There is no “lender of last resort” for muniland.

Debt for the Next Generation

Among the hundreds of California school districts signing up for CABs were fifteen in Orange County. The Anaheim-based Savanna School District took on the costliest of these bonds, issuing $239,721 in CABs in 2009 for which it will have to repay $3.6 million by the final maturity date in 2034. That works out to $15 for every $1 borrowed.

Santa Ana Unified issued $34.8 million in CABs in 2011. It will have to repay $305.5 million by the maturity date in 2047, or $9.76 for every dollar borrowed.

Placentia-Yorba Linda Unified issued $22.1 million in capital appreciation bonds in 2011. It will have to repay $281 million by the maturity date in 2049, or $12.73 for every dollar borrowed.

In 2013, California finally passed a law limiting debt service on CABs to four times principal, and limiting their maturity to a maximum of 25 years. But the bill is not retroactive. In several decades, the 400 cities that have been drawn into these shark-infested waters could be facing municipal bankruptcy – for capital “improvements” that will by then be obsolete and need to be replaced.

Then-State Treasurer Bill Lockyer called the bonds “debt for the next generation.” But some economists argue that it is a transfer of wealth, not between generations, but between classes – from the poor to the rich. Capital investments were once funded with property taxes, particularly those paid by wealthy homeowners and corporations. But California’s property tax receipts were slashed by Proposition 13 and the housing crisis, forcing school costs to be borne by middle-class households and the students themselves.

The same kind of funding shift has occurred in college education nationally. Tuition at public universities and colleges was at one time free. But in successive economic downturns, states have made up for shortfalls in educational budgets by raising tuition. By 2012, tuition was covering 44% of the operating expenses of public higher education. According to a March 2014 report by Demos, 7 out of 10 college seniors now borrow, and their average debt on graduation is over $29,000.  The result nationally is a student debt that has grown to $1.5 trillion.

The State that Escaped: North Dakota  

According to Demos, per-student funding has been slashed since 2008 in every state but one – the indomitable North Dakota. What is so different about that state? Some commentators credit the oil boom, but other states with oil have not fared so well. And the boom did not actually hit in North Dakota until 2010. The budget of every state but North Dakota had already slipped into the red by the spring of 2009.

One thing that does single the state out is that North Dakota alone has its own depository bank. The state-owned Bank of North Dakota (BND) was making 1% loans to school districts even in December 2014, when global oil prices had dropped by half. That month, the BND granted a $10 million construction loan to McKenzie County Public School No. 1, at an interest rate of 1% payable over 20 years. Over the life of the loan, that works out to $.20 in simple interest or $.22 in compound interest for every $1 borrowed. Compare that to the $15 owed for every dollar borrowed by Anaheim’s Savanna School District or the $10 owed for every dollar borrowed by Santa Ana Unified.

How can the BND afford to make these very low interest loans and still turn a profit? The answer is that its costs are very low. It has no exorbitantly-paid executives; pays no bonuses, fees, or commissions; pays no dividends to private shareholders; and has low borrowing costs. It does not need to advertise for depositors (it has a captive deposit base in the state itself) or for borrowers (it is a wholesale bank that partners with local banks, which find the borrowers). The BND also has no losses from derivative trades gone wrong. It engages in old-fashioned conservative banking and does not speculate in derivatives. Unlike the vampire squids of Wall Street, it is not motivated to maximize its bottom line in a predatory way. Its mandate is simply to serve the public interest.

North Dakota currently has a population of about 740,000, or the size of Santa Ana and Anaheim combined. If a coalition of several such cities were to form a municipally-owned bank, they too could have their own low-cost capital funding mechanism, allowing them to escape the budget-sucking tentacles of Wall Street’s vampire squids.


Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her blog articles (nearly 300) are at EllenBrown.com.

39 Responses

  1. Ellen … do you think some of those public banks in ND will go bankrupt on the basis of what has taken place in the oil & gas industry there ?

    • Hi Lise, there is actually only one public bank in North Dakota, the one owned by the state. It won’t go bankrupt. It has amassed a very large capital base, it has a captive deposit base in the state itself, it does conservative lending, and the state has been through oil booms and busts before, so they are prepared for it. The BND’s revenues are not dependent on oil revenues.

    • Lise; the BOND has withstood not only repeated economic hard times for the rest of the country, but continuous attacks from wallstreet….that is how secure it is and how good it is for the American public of that state.

  2. Once again, a FANTASTIC article. Thank you for keeping up the good work! Did anyone record the recent Santa Ana, Orange County presentation with Ellen and Richard Wolff? Thanks as always, Tom Haberkorn

    • Thanks Thomas! That presentation was recorded, and I know KPFK was giving DVDs of it away for their fundraiser yesterday (I did an interview with them), but I haven’t seen it. If they send it, I’ll post it on my blog.

  3. Financial Terrorism set upon us by the deregulation of the banks and the Regulatory Authorities of course lobbied and financed by Wall Street!

    Should be really be at all surprise by all of this???

    Consumer protection is nothing but communistic socialistic dogma, that is used to delude rather than instill hope of any form of real honest actual reform of Financial rules, Regulations and Laws.

    After all the “PAYDAY LOANS” Ponzi scheme is allowed, promoted against the poor, the underprivileged, and the Middle class by our Politicians, and our paid Financial Regulatory Authorities!

    Why not go after the Tax payers provided and paid for institutions (school, colleges, universities, libraries, social, judicial, police, and fire service), after all the poor, the underprivileged, and the Middle class can afford to be swindle, then defrauded, hence sent back into abstract poverty by the Bankers, Wall Street, the Regulatory Authorities, and of course at our Politicians bequest!

    After all the Bankers, Wall Street, the Regulatory Authorities, and our elected Politicians have already stolen, defrauded, embezzled, and pocketed everything else that was not nailed down already!

  4. CABs ? WOW ! No Way ! Where are the federal judges and congress or potus in this ?… why is this allowed to happen ?

  5. Wall Street should be burned to the ground, for all of eternity

  6. As always right on the money, no pun intended.  I would very much like to speak to face to face, I would travel to you. I am going to go get your book. Public Bank Solutions. I want to start a bank in Alabama, so I would like to to a cookie cutter in other states regarding this. We need to take our country and banking back. I know we can.  One man with courage makes a majority, Andrew Jackson.  I pray that I have that courage, GOD willing I will. Amen David    From: WEB OF DEBT BLOG To: construction.batch@yahoo.com Sent: Friday, February 20, 2015 12:14 PM Subject: [New post] Swimming with the Sharks: Goldman Sachs, School Districts, and Capital Appreciation Bonds #yiv5403113399 a:hover {color:red;}#yiv5403113399 a {text-decoration:none;color:#0088cc;}#yiv5403113399 a.yiv5403113399primaryactionlink:link, #yiv5403113399 a.yiv5403113399primaryactionlink:visited {background-color:#2585B2;color:#fff;}#yiv5403113399 a.yiv5403113399primaryactionlink:hover, #yiv5403113399 a.yiv5403113399primaryactionlink:active {background-color:#11729E;color:#fff;}#yiv5403113399 WordPress.com | Ellen Brown posted: “The fliers touted new ballfields, science labs and modern classrooms. They didn’t mention the crushing debt or the investment bank that stood to make millions.                        — Melody Peterson, Orange County Register, February 15, 2013  Rem” | |

    • Thanks David. I’ll reply by email.

  7. Wow, Ellen, thank you!

    As I keep saying, each of your articles is even more powerful than the last. It’s a wild ride that we’ll keep working to document. Until we have arrests among “leaders” in war and what we use for money for lies, looting, and war-murders, We the People will continue to suffer from these parasites.

  8. Thanks Carl!

  9. Which man or woman member of the House of Representatives or Senate will introduce a bill prohibiting public schools, governments, public employee pension plans, etc (all public monies) from financial contracts with any privately-owned banking institutions, guaranteeing public funds become deposited, and transactions become conducted, only in public banks?

    • Such a bill, if introduced, would never pass. This government is fully captured by banks and corporations, and will only serve their interests.

  10. […] Ellen Brown Web of Debt […]

  11. Goldman Sachs and their criminal elite friends on Wall st have “Hi-Jacked” America. Not only that, they have bought the President, both Parties, Congress and the American Legal system, but they have also enslaved everyone in debt.
    It’s not Terrorists, or Muslims, the Russians, the Chinese etc etc that America has to fear. It’s the “Elite Oligarchs” who have ‘white anted”, and taken control of your country.

  12. Reblogged this on tommichaels886.

  13. Reblogged this on Joseph Davis and commented:
    “Gullible school districts agreed to these payday-like loans because they needed the facilities, the voters would not agree to higher taxes, and state educational funding was exhausted. School districts wound up sporting shiny new gymnasiums and auditoriums while they were cutting back on teachers and increasing classroom sizes. (AB1388 covers only long-term capital improvements, not daily operating expenses.) The folly of the bonds was reminiscent of those boondoggles pushed on Third World countries by the World Bank and IMF, trapping them under a mountain of debt that continued to compound decades later.

    The Federal Reserve could have made virtually-interest-free loans available to local governments, as it did for banks. But the Fed (whose twelve branches are 100% owned by private banks) declined.”

  14. Dear Dr. Brown, you article ‘Swimming with shark’ position my understanding on how all street operates to impoverish this beautiful country. A big ‘THANK YOU’ I will use my newly acquired understanding to help my friends in Italy. As I am American citizen my country of origination occupy a special spot. My opinion is that in the American history (Some time down that road) you will occupy the same place as our founding fathers, or our biggest heroes.

  15. […] Swimming with the Sharks: Goldman Sachs, School Districts, and Capital Appreciation Bonds […]

  16. […] Source WebOfDebt  Feb 20 […]

  17. […] ⇧   Swimming with the Sharks: Goldman Sachs, School Districts, and Capital Appreciation Bonds | WEB OF D… […]

  18. […] Comment: The predatory tactics of these investment bankers and their clients have reduced millions to debt servitude, as there is no way for many to repay. Generations are being impoverished and due to the highly profitable prison industrial complex, a system of debtors prisons has arisen as poverty has become a crime. https://ellenbrown.com/2015/02/20/swimming-with-the-sharks-goldman-sachs-school-districts-and-capital… […]

  19. Ellen you left out a factor. School boards and/or those who have the authority to borrow for capital projects also work a scam against the tax payers. When new school buildings are built they get a double whammy in kickbacks. As always, the general contractor knows going in that he will have to pay a kickback to school officials. They also get a kickback from the bond issuers.

    The community in which I live is building new schools despite the fact we have a declining school age population. It is the same most everywhere.

    • This rings true. Local politicians probably have cushy relations with contractors and can always use “campaign funds (bribes) — the “upper class” putting one over on the “plebes.” An I suppose it happens on all levels and not just in education. Here in Seattle they blew up the magnificent Kingdome stadium against the voters wishes and built 2 ugly new stadiums instead, and went ahead with the multi-billion dollar tunnel boondoggle even though the old viaduct could have been cheaply retrofitted according to engineers. Banks, politicians, and construction people colluded and make out MUCH BETTER than bandits.

  20. selling mortgage backed securities as AAA out the front door and shorting them out the back door is fraud, plain and simple, which GS did and has suffered not one criminal charge.

    as always, it ‘pays’ to be connected. in fact, as is shown, the ‘connected’ can do their ‘thing’ over and over with no consequence.

  21. […] By Ellen Brown, The Web of Debt Blog […]

  22. Ellen,

    Your argument against Capital Appreciation Bonds is off. These are nothing more than what were called “zero coupon bonds” in the 1980s, which were the stripped portions of US Treasuries where the principle payment and the various coupon payments were sold separately.

    They had a precursor in the various very low coupon munies (fractionals) that were sold in the 1960s and 1970s, bonds that carried coupons or from 0.05% (1/20 %) up to about 1/4% per annum. No one got exercised then about the balloon payment due at the end, and no one should get exercised about what is implied with these bonds now.. The problem arises when the rate at which the amount compounds is vastly different from the market rate, which appears to be the case now.

    Everyone who was involved with zeros and fractionals knows that they sold at very low prices and promised to pay the par value upon maturity many years in the future.

    In a traditional muni issue, there are bonds maturing each year, from 1 year to, say, 30 years. The present value of the principal repayment of the longer bonds is very low, even though each maturity value is $1000. This is what you object to here.

    What you should be concerned with is the interest rates implied in the numbers you cite. Divide the final payment by the proceeds today to give the total growth number. Take the nth root of that number, where the n is the number of years, then subtract 1 from that number to get the interest rate implied in the bond. To wit

    Savanna SD borrows for 20 years, at a rate of 14.5%.

    Santa Ana USD borrows for 32 years at a rate of 7%.

    Placentia Yorba Linda borrows for 34 years at a rate of 7.75%.

    These numbers, while shocking in their divergence from market rates, are merely an example of compound interest at work.

    You should attack the interest rates implied in the terms and conditions, not the instrument itself, unless you want to repeal the principle of compound interest.. Saying, as you do, that a school district will have to repay $15 for every dollar borrowed and that this is evidence of malfeasance is wrong, unless there is a sharp divergence from market rates, which you never mention.


    Barry Harmon

    • Barry, it’s easier to illustrate this Wall Street rip off by using the rule of 72; to wit, if a dollar borrowed now costs $15 dollars to be paid back in about 25 years (using the Savana school district case), then about 4 doublings have occurred in to 25 years, or one doubling every 6 years, which implies an annual compound interest rate of 12%.

      TWELVE PERCENT !!!!!!


      How much of this money was given to contractors close to school board members? How much was paid in bribes? It must have been a lot because 12% annual interest is unconscionable for an ethical school district to have agreed to.

      Ellen’s point is correct; our government at all levels should be restricted to borrowing money ONLY FROM state owned banks. Only state owned banks should be allowed to create ‘public credit’, never private banks.

      What has happened is that today’s oligarchs never run out of money to loan to the plebians; endless fiat money that is owed back to them with interest in a never ending cycle of debt slavery.

      Millions of us are determined to stop this. Thanks to people like Ellen Brown, the word is spreading. I have told hundreds of people to read her book over the last few years and have explained her ideas to them. The response was lukewarm at first, but now thanks to the economic crisis, more and more people agree with her ideas.

      • Steve, I agree that this looks like a payoff, but I can tell you, from being in on a lot of muni bond deals and pension deals, that it’s really pretty simple..

        The Wall Street guys and their myrmidons show up in their three piece suits, slicked-back hair and tassel loafers, with the seeming air of omnipotence and the rubes on the school board or whatever muni group or pension board is sitting there stand no chance at all of getting a fair deal. The WS guys overwhelm them with their talk of other deals and how the “big boys” are playing the game and the deal gets done. The payoff is that the school board gets to brag about being in the game, associating with the big boys. Don’t you wonder what the guys in Jefferson County Alabama think of their deal now?

        I agree that 12% is a crime, especially in this economic environment, but the real numbers get buried in the tenth page in a footnote, which no one reads.

        The correction is simple: put everything out for competitive bid and have the bids reviewed by someone local who knows what’s what, maybe a professor of finance at a local college or university.

        As for Ellen’s efforts on behalf of state banks, I’m for this 110%. I’d like to see a small New England state, maybe Vermont, take the plunge. This is going to get done if we can convince a few small states to lead the effort. Rhode Island would be ideal, but they are in so much trouble that they probably couldn’t take the lead.

        Your mention of fiat money is off; we are stuck in a world of fiat money and there is no alternative. Would you go back to the gold standard? Another commodity standard? You would have been more on target calling out the Federal Reserve and their “stewardship” of the US economy over the past 112 years. The idea of people managing any economy larger than, say, Chad, is ludicrous on its face. Janet Yellin is going to know when it’s “time” to raise interest rates? The Fed has caused more damage to the US than any other entity I can think of.

        Just some ideas and comments.

        Barry Harmon

  23. […] By Ellen Brown Global Research February 21, 2015 The Web of Debt […]

  24. […] Swimming with the Sharks: Goldman Sachs, School Districts, and Capital Appreciation Bonds […]

  25. Per-student funding has been slashed since 2008 in every state but one – the indomitable North Dakota?? This is hard to belive

    • Personally I do not find hard to believe North Dakota educational policies. I must tell you that my knowledge is limited as I live in Boston area. Some states including N.D. if and when are in financial position to deliver sensitive policies; this very states will keep their promises. I am stating the above because I refuse to believe that the american spirit (For the people and by the people) is dead and North Dakota is a beautiful example.

  26. […] Originally published at Ellen Brown. […]

  27. […] Continue reading… → […]

  28. […] — source ellenbrown.com […]

  29. Reblogged this on The Economic Contrarian and commented:
    I placed a link to the following editorial on this site nearly a year ago. My bet is not many read the editorial. I believe it is of such importance that I wanted to reprint it. I went looking for this article after a conversation I recently had with a friend and former senator. I was complaining about the poor financial decisions the government seems to continually make. My friend asked why is government always the stooge when it comes to finances? He’s right — when you read the article below, can you imagine anyone, whether it is your personal finances or a business you were operating, making these types of financial decisions? If they did, they would not last long.
    I wrote on a similar situation shortly after the 2008 economic collapse. A school district in the L.A. region was bragging about the new high-tech, modern high school they had built. The price tag was astronomical. One bright reporter asked if this was a good time to spend so much money on such a project. The superintendent’s response was, “Oh, don’t worry about the money, this was all done with bonds.” Yep, that’s what I was afraid of. We will end up paying that astronomical bill 20 times over!
    Predatory lending exists for one reason. There are people in positions of financial responsibility stupid enough to agree to the loans. The next time Goldman Sachs CEO, Lloyd Blankfein, suggests that he “Is just doing God’s work.” He should look up God’s definition of the term usury!
    Usury, by the way, seems to be the United States’ number one export these days. But don’t worry, the too-big-to-fail banks will always be in this export business because they have the unlimited backing of the central banks and their printing presses. Remember subprime home loans? When they blew up in the faces of the Wall Street banks, the Fed came to the rescue and took those loans off the banks’ balance sheets and transferred them the Fed’s balance sheet. What a great deal!

  30. Reblogged this on Mining Awareness + .

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