And where was the Turnpike’s vaunted legal counsel, James Aloisi, during this debacle? Is this one of the bodies that he is supposed to know about or is he just interested in keeping his role buried? It seems pretty sketchy and not at all in line with the “transparency” rhetoric from the Governor. In fact this whole mess stinks.
davessays
Why would Mr. Aloisi be involved? This was not a turnpike deal. It was done by the State Treasurer’s office, inches away from, and under the nose of, “Treasurer Tim.” Why doesn’t he explain it?
Former Turnpike Authority board member Christy Mihos, who voted for the UBS swaps, called Dormitzer and Irvin “a very credible group of financial advisers.”
“These guys did the right thing for us,” Mihos said. “Had the Turnpike kept an A rating on the bonds, we wouldn’t even be talking about all this.”
garysays
The Pike swaption was a great deal. Everyone wins. Lehman and UBS got some dough. The state had variable debt and was able to lock in a fixed rate. The only tiny little impossible risk was that if the credit markets failed as badly as they had in 100 years, the Pike wouldn’t be able to refinance in the event that UBS called its contract. Everyone went all in with eyes wide opened. Now, the loser (us) is calling foul because the low probability outcome, happened.
petrsays
The Pike swaption was a great deal. Everyone wins. Lehman and UBS got some dough. The state had variable debt and was able to lock in a fixed rate. The only tiny little impossible risk was that if the credit markets failed as badly as they had in 100 years,…
<
p>And only 3 years after G Dubyas’ SEC allowed the 5 largest investment banks to ‘relax’ their rules on leveraging… who’d a thunk it? Only a tiny little impossible risk.
<
p>Please, Misteer Creosote, eet ees jus a meent. It ees only wah-fair thin…
<
p>
…the Pike wouldn’t be able to refinance in the event that UBS called its contract. Everyone went all in with eyes wide opened. Now, the loser (us) is calling foul because the low probability outcome, happened.
The low probability outcome was the simultanous triggering of the offsetting swaptions that the entire house of cards depended upon. There’s little reason, aside from naked collusion, to think this would have occurred.
We now know, also, that Lehman was spectacularly mismanaged and extraordinarily over-leveraged. I’m sure the Pike isn’t the only entity left reeling in the absence of Lehmans’ market savvy…
<
p>It’s kinda like when your wife, a nurse who works the overnight shift, loses her job, to find you’ve been spending your nights with a nurse who works the day shift… If only the low probability outcome of wifely unemployment hadn’t happened, you’d still be happy…
garysays
For what it’s worth, my reference to tiny, little, impossible risk was pure sarcasm.
do you really think the swaptions were a good deal that went really bad because of an unexpectedly bad situation, or do you think there was too much risk?
garysays
I actually think they were good deals. Who would have imagined that the credit markets would have gone so bad that an authority the size of the Pike would have been unable to access the re-finance market. It was a risk but years ago who would have given it any serious probability.
<
p>However, it was only a good deal in light of the circumstances: the Pike was in complete gridlock with expenses exceeding revenues and a Board that was unable or unwilling to address expenses or revenues. As a result they turned to creative deal-making to access cashflow from other sources: the interest rate swaps.
petrsays
I actually think they were good deals. Who would have imagined that the credit markets would have gone so bad that an authority the size of the Pike would have been unable to access the re-finance market.
<
p>… as anyone who’s owned more than two credit cards knows: there’s a point at which revolving debt goes from a (possibly) necessary evil to a downright evil evil.
<
p>Clearly, this borders on abuse of the credit re-finance market and maybe the total collapse of the system had to happen… If only because of the sheer weight of the inter-dependencies was massively disproportionate to the strength of the load-bearing parts… Or, put another way; what are bubbles for?
Wasn’t the risk actually quite high. Yes, it was unlikely that both swaptions would be called at the same time. But it was very likely that one or the other of them would be called if market conditions changed. Therefore, the real risk was that the status quo wouldn’t last forever, which it rarely does. This did not require a once in a lifetime crisis to turn bad.
petrsays
Wasn’t the risk actually quite high[?] Yes, it was unlikely that both swaptions would be called at the same time. But it was very likely that one or the other of them would be called if market conditions changed.
<
p>The swaptions weren’t competing, they were designed to be complimentary: The only way the swaptions make any sense (for the Pike) is if they were excercised more or less simultaneously. If one was called, and the other wasn’t, the Pike was screwed. If the other was called and the first wasn’t, again the Pike was screwed. Only if they are called simultaneously is the Pike sitting pretty… There’s very little to suggest that this would happen in the due course of business. So, yes, the risk was extreme. But, as has been noted (by the Globe, and others) the relationship between the Pike and Lehman was very very close…
<
p>And for those who don’t get it: I’m implying an improper relationship between the Pike and Lehman: outright collusion, whereby the Pike may have planned to simply pick up the phone, call Lehman and say “UBS is pulling the trigger”. Whereupon a counter-trigger would be pulled that would save the Pikes bacon. Lehman, for all intents and purposes here, has simply vanished and can’t pull that trigger. Oops. I’m not certain this is illegal, or even if that’s germane here, but what’s clear is that it reached a level of complexity and chicanery that was beyond the ability of the numbskulls at the Pike to comprehend.
garysays
The Swaps went both ways, and it was high probability that there could be a large swing, one way or the other in rates. The low probability risk was that rates would swing one way or the other AND the Pike would be unable to refinance.
And where was the Turnpike’s vaunted legal counsel, James Aloisi, during this debacle? Is this one of the bodies that he is supposed to know about or is he just interested in keeping his role buried? It seems pretty sketchy and not at all in line with the “transparency” rhetoric from the Governor. In fact this whole mess stinks.
Why would Mr. Aloisi be involved? This was not a turnpike deal. It was done by the State Treasurer’s office, inches away from, and under the nose of, “Treasurer Tim.” Why doesn’t he explain it?
Former Patrick aide at center of turnpike finance deals gone bad
<
p> Mass Pike “bailout” attacked by state treasurer
<
p>I may be wrong, but I don’t think the Treasurer’s office negotiates the terms of the finances of the Pike. I think the Pike board and its administration does that and if they need to sell special purpose bonds the State Treasurer is the one who has to take them to Wall Street to sell. I could be wrong. It is interesting that Jay Gonzalez, Dormitzer’s successor at A & F, was an attorney at the firm that specializes in public finance Edwards Angell, Palmer & Dodge. Did he work on these deals? Oh! Boston partner Jay Gonzalez, who practices in the firm’s Public Finance Department.. This is starting to really wreak. Bond financing of Massachusetts Turnpike improvements
The Pike swaption was a great deal. Everyone wins. Lehman and UBS got some dough. The state had variable debt and was able to lock in a fixed rate. The only tiny little impossible risk was that if the credit markets failed as badly as they had in 100 years, the Pike wouldn’t be able to refinance in the event that UBS called its contract. Everyone went all in with eyes wide opened. Now, the loser (us) is calling foul because the low probability outcome, happened.
<
p>And only 3 years after G Dubyas’ SEC allowed the 5 largest investment banks to ‘relax’ their rules on leveraging… who’d a thunk it? Only a tiny little impossible risk.
<
p>Please, Misteer Creosote, eet ees jus a meent. It ees only wah-fair thin…
<
p>
The low probability outcome was the simultanous triggering of the offsetting swaptions that the entire house of cards depended upon. There’s little reason, aside from naked collusion, to think this would have occurred.
We now know, also, that Lehman was spectacularly mismanaged and extraordinarily over-leveraged. I’m sure the Pike isn’t the only entity left reeling in the absence of Lehmans’ market savvy…
<
p>It’s kinda like when your wife, a nurse who works the overnight shift, loses her job, to find you’ve been spending your nights with a nurse who works the day shift… If only the low probability outcome of wifely unemployment hadn’t happened, you’d still be happy…
For what it’s worth, my reference to tiny, little, impossible risk was pure sarcasm.
do you really think the swaptions were a good deal that went really bad because of an unexpectedly bad situation, or do you think there was too much risk?
I actually think they were good deals. Who would have imagined that the credit markets would have gone so bad that an authority the size of the Pike would have been unable to access the re-finance market. It was a risk but years ago who would have given it any serious probability.
<
p>However, it was only a good deal in light of the circumstances: the Pike was in complete gridlock with expenses exceeding revenues and a Board that was unable or unwilling to address expenses or revenues. As a result they turned to creative deal-making to access cashflow from other sources: the interest rate swaps.
<
p>… as anyone who’s owned more than two credit cards knows: there’s a point at which revolving debt goes from a (possibly) necessary evil to a downright evil evil.
<
p>Clearly, this borders on abuse of the credit re-finance market and maybe the total collapse of the system had to happen… If only because of the sheer weight of the inter-dependencies was massively disproportionate to the strength of the load-bearing parts… Or, put another way; what are bubbles for?
Wasn’t the risk actually quite high. Yes, it was unlikely that both swaptions would be called at the same time. But it was very likely that one or the other of them would be called if market conditions changed. Therefore, the real risk was that the status quo wouldn’t last forever, which it rarely does. This did not require a once in a lifetime crisis to turn bad.
<
p>The swaptions weren’t competing, they were designed to be complimentary: The only way the swaptions make any sense (for the Pike) is if they were excercised more or less simultaneously. If one was called, and the other wasn’t, the Pike was screwed. If the other was called and the first wasn’t, again the Pike was screwed. Only if they are called simultaneously is the Pike sitting pretty… There’s very little to suggest that this would happen in the due course of business. So, yes, the risk was extreme. But, as has been noted (by the Globe, and others) the relationship between the Pike and Lehman was very very close…
<
p>And for those who don’t get it: I’m implying an improper relationship between the Pike and Lehman: outright collusion, whereby the Pike may have planned to simply pick up the phone, call Lehman and say “UBS is pulling the trigger”. Whereupon a counter-trigger would be pulled that would save the Pikes bacon. Lehman, for all intents and purposes here, has simply vanished and can’t pull that trigger. Oops. I’m not certain this is illegal, or even if that’s germane here, but what’s clear is that it reached a level of complexity and chicanery that was beyond the ability of the numbskulls at the Pike to comprehend.
The Swaps went both ways, and it was high probability that there could be a large swing, one way or the other in rates. The low probability risk was that rates would swing one way or the other AND the Pike would be unable to refinance.
Thus, the tolls.