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

February 1, 2017

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!


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.

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  1. Andy S. permalink
    February 1, 2017 10:43 am

    Great post Jon! Thanks for re-sharing the editorial from last year. It’s very revealing to see how small State Charter banks like the one in North Dakota operate so differently than the big boys on Wall Street. My Dad worked for a similar small bank in Ohio many years ago. He knew his customers well and had very few loans default. The problem loans they had resulted from predatory buyers from big firms in NY that came in and tried to force them to make loans he knew were poor risk. It was going on then and has only gotten worse. Knowledge is power, and we need to stay vigilant – now more than ever.

    • Jon permalink
      February 1, 2017 5:02 pm

      Thanks Andy,

      Boy I bet your dad would have flipped if he saw banking the way it’s done by the too big to fail banks these days! There are a lot of small banks and credit unions that do things the old fashion way. They are reputable and actually care about their customers… and they will never be appointed to key government positions and institutions where their ethics are so desperately needed. Thanks for being a reader Andy, Jon

  2. Wayne Heine permalink
    February 13, 2017 1:57 pm

    Hi Jon,

    Enjoyed the article. It appears that globalization of the credit market is alive and well. For awhile i’ve been concerned, as I know you have, that our school districts lacked the fundamental financial knowledge to understand the actual cost of bond funding. I think for too long school districts have only promoted from the educator ranks leaving all other potential CEO candidates on the sidelines. As a result of only hiring and promoting from within the world of academia many of the skill sets that make a good CEO have been lost. Consequently, we now have educators in charge. And charge they do, without any regard for the long term costs associated with the charge accounts created today.

    I do believe, however, that California’s excessive bond spending extends far beyond the school system. The voters, without regard for future costs, have a long track record of approving any bond measure placed on the ballot. Unfortunately, for the ill-informed the cost of servicing an paying for these bonds rest on taxpayer’s shoulders. There appears to be little, if any, understanding on behalf of the average voter of the actual cost of repaying a bond. Moreover, most voters couldn’t tell you what a bond is? I doubt most voters understand that a bond is a interest only loan. I doubt most voters understand that at the end of the loan term the full amount of the loan is due and payable. I doubt most voters understand that bonds can be rolled-over and never paid in full as interest on the loan continues to be paid. I also, doubt that most voters understand that bonds, for the most part, support projects that need to be replaced over time, resulting in creating new bonds to replace the old bonds.

    The bond market has been very lucrative over the past 70 years and I suspect it will continue to be even more lucrative in the future, as government, at all levels increases it’s need to fund existing projects and new programs through bonds.

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