TPMMuckraker
Municipal finance

Behind Montana Jail Fiasco: How Private Prison Developers Prey On Desperate Towns

Justin Elliott | October 12, 2009, 3:14PM

Two Rivers Authority parade float, 6/27/09

With the unraveling of the deal for the shadowy American Private Police Force to take over and populate an empty jail in Hardin, Montana, it's pretty clear that the small city got played by an ex-con and his (supposed) private security firm.

But an investigation by TPMmuckraker into how Hardin ended up with the 92,000 square foot facility in the first place suggests that, long before "low-level card shark" Michael Hilton ever came to town, Hardin officials had already been taken for a ride by a far more powerful set of players: a well-organized consortium of private companies headquartered around the country, which specializes in pitching speculative and risky prison projects to local governments desperate for jobs.

The projects have generated multi-million dollar profits for the companies involved, but often haven't created the anticipated payoff for the communities, and have left a string of failed or failing prisons in their wake.

"They look for an impoverished town that's desperate," says Frank Smith of the Private Corrections Institute, a Florida-based group that opposes prison privatization. "They come in looking very impressive, saying, 'We'll make money rain from the skies.' In fact, they don't care whether it works or not."

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Topics: American Police Force, CiviGenics, Corplan, GSA, Hale-Mills Construction, Hardin, Hardin Montana, Howard Geisler, James Parkey, Michael Harling, Muncipal bonds, Municipal Capital Markets, Municipal finance, Private Prison Business

Steve Rattner

If Steve Rattner's Scandal Sounds A Lot Like Bill Richardson's, There's A Reason For That

Moe Tkacik | April 21, 2009, 11:24AM

It may not be sexy like Kwame's sexting, or Larry's bathroom stall rendezvous, or Foggo's prostitutes in hot tubs, but for sheer scale of conspicuous muck, the state pension fund scandals bubbling up around the country are in a league of their own. And while it may be hard for you to get your head around as fundamentally dry a subject as state pension funds, the underlying alleged wrongdoing is same as it ever was: billions of dollars in state business steered to politically connected firms, kickbacks, and taxpayers left holding the bill.

You don't have to scratch too far beneath the surface to find the same patterns--and sometimes the same players--emerging from state to state.

Let's start with Obama car czar and billionaire money manager Steve Rattner. Last Friday the Wall Street Journal reported that Rattner was the money manager referenced in an SEC indictment in a pay-for-play scheme run by the top adviser to the former New York State Comptroller that allegedly siphoned more than $30 million off asset managers seeking investments from the state pension fund.

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Topics: Bill Richardson, Municipal finance, Steve Rattner

Steve Rattner

Did Auto Czar Steve Rattner Help Scam New York Pensioners?

Moe Tkacik | April 17, 2009, 2:12PM

Steve Rattner, the money manager who is Obama's top adviser on bailing out the auto industry, is uncomfortably close to a criminal investigation into the New York state pension fund, newspapers reported today.

In October 2004 Rattner, the private equity investor and former New York Times reporter who is leading (if not quite the "czar" of) the Obama administration's task force to save the auto industry, met with David Loglisci, the recently-indicted chief investment officer of the New York General Pension Fund to solicit an investment in his private equity fund Quandrangle, according to news reports in today's New York Times and the Wall Street Journal. By January Rattner's fund had allegedly signed a written agreement to give a 1.1% cut of whatever investment Quadrangle received from the fund to Henry Morris, the (also recently indicted) former aide to the disgraced former state comptroller Alan Hevesi. A few days later, as if to sweeten the deal, Rattner agreed to meet with Loglisci's brother and wound up investing $88,841 for the DVD distribution rights to a movie that had grossed barely a third of that during its brief release in theaters through a Quadrangle affiliate called GT Brands. (The brother produced the movie, Chooch.) Three weeks later, Loglisci the CIO "personally informed" Rattner that Quadrangle would be getting a $100 million investment from the pension fund -- and over the next two and a half years Morris would in turn collect over a million dollars in "finders fees" for the transactions.

Those, at least, are the allegations of a lawsuit filed Wednesday by the SEC against Morris, Loglisci and two of their associates in the latest development in the protracted pay-to-play probe of New York state pension funds. The lawsuit only makes reference to a "Quadrangle executive" but the Times and the Journal quote sources confirming the executive is Rattner. Both papers also specify that Rattner is not himself a target of the probe, and that he told the administration about the investigation when he took the job.

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Topics: Municipal finance, Steve Rattner

Muncipal bonds

Another Faustian Swap: Indianapolis Water Authority Forced To Cough Up $100 Million-Plus

Moe Tkacik | April 13, 2009, 6:28PM

Another day, another group of American taxpayers forced to cough up tens of millions of dollars to Wall Street over a little-noticed provision in a "swap" contract gone sour. Last week we brought you the parallel tales of sudden budgetary meltdown in Tennessee, Alabama, Illinois, New Mexico and Philadelphia that in part prompted the credit rating agency Moody's to issue a blanket negative credit outlook on all bonds issued by American cities and towns. Today it's the Indianapolis Water Authority being screwed in a swap deal that might force the utility -- and by extension, its customers -- to cough up a collateral call of as much as $100 million.

The deal is a familiar one: in 2005 the city of Indianapolis refinanced $550 million in fixed-rate bonds to raise money to fund its acquisition of its old water company from the private utility company NiSource, which agreed to sell it as a condition of regulatory approval of its merger with Columbia Energy Group. The deal involved the ailing bond insurer MBIA as well as a similar German-Irish firm called Depfa Bank, which insure the utility's ability to pay up by writing credit default swaps on municipal bonds that protect investors in the event of default. But as Barney Frank pointed out last week, the risk of municipal bonds defaulting is historically minimal -- while the risk that MBIA and Depfa might default was steadily rising as they began to chase the riskier (AIG-dominated) business of writing swaps on collateralized debt obligations. And when those "insurers" started to see their credit downgraded last year, suddenly it was municipalities like Indianapolis that were swamped with calls demanding collateral -- which translates to a major refinancing being funded by an emergency 17.5% rate hike this summer.

If you're having trouble getting your head around how this works, it's a little like this: in order to get a cheaper interest rate on your mortgage, you pay you bank extra for a "swap" insuring the investors who buy the mortgage in the case of your default. But then the bank that originated the mortgage starts making riskier loans and its credit rating agencies downgrade its debt, it turns out the owner of your mortgage can demand collateral from you. Except in the case of municipal bonds, the homeowners are cities and towns with the legal authority to tax citizens and an infintessimal record of actually defaulting -- and the banks were using your interest payments to extend home loans to unemployed high school dropouts and senile 80-year-olds living on Social Security.

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Topics: Indianapolis Water Authority, MBIA Inc., Muncipal bonds, Municipal finance

Berkshire-Hathaway

Barney Frank Rousts Credit Rating Firm For...Being Too Negative?

Moe Tkacik | April 9, 2009, 5:14PM

Credit rating agencies are coming under fire from Congress again -- but this time it's for being too pessimistic. After Moody's issued an unprecedented across-the-board negative credit outlook on all American cities and towns yesterday, House Financial Services Committee Chairman Barney Frank issued his own negative assessment of Moody's, and scheduled a hearing to investigate:

I am troubled by the action of Moody's Investors Service to issue a negative outlook across the board on America's municipalities, which could raise the interest rates on cities and towns making it more expensive to borrow funds for infrastructure improvements.

On the face of it, this seems like a perverse round of messenger shooting. But last March, as cities and towns across the country started getting flooded with demands for huge payouts rooted in arcane details of "swap" contracts they'd inked with banks that managed their bond offerings, Frank discovered something truly perverse: the public sector was being scammed on multiple fronts by the investment banks underwriting their bond offerings -- and the profits directly fed the disastrous trade of risky mortgage-linked credit default swaps that hastened the financial meltdown.

The scheme started at the credit ratings agencies, which keep two sets of standards for grading corporate and municipal bonds -- and municipalities are held to a much higher standard, as Frank explained in a hearing using Moody's own data:

I will be giving out this chart, sectoral breakdown of Moody's rated issuers and defaulters, 1970 to 2000, general obligation bonds, there it is. Number of issuers 14,775. Number of defaults, 0.

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Topics: AIG, AMBAC, Barney Frank, Berkshire-Hathaway, Mel Watt, Moody's Investors Service, Muncipal bonds, Municipal finance

Morgan Keegan

"What The Hell Are Alabama Residents Doing Trading Swaptions?" Just Ask Tennessee...

Moe Tkacik | April 8, 2009, 12:24PM

A day after the credit rating agency Moody's issued an unprecedented blanket negative outlook report on the debt of all American cities and towns, a fascinating New York Times story today further illuminates the process by which so many small municipalities signed on to risky derivative securities contracts that exploded on them last year, in some cases quadrupling their interest payments.

The story focuses on Tennessee and the Memphis-based investment bank Morgan Keegan, which recently celebrated its rise to top underwriter status in the state and the south central U.S., managing a whopping 39% of Tennessee bond issuances last year.

Tennessee is one of few states with laws requiring public officials charged with approving derivatives deals to attend "swap school" to learn about the risks and complexities of the contracts. The state comptroller says he asked business professors to write the swap school textbooks, but when they declined the task was left to...Morgan Keegan, which had also been retained as an adviser to many of the state's towns.

In many corners of Tennessee, the first anyone heard of interest-rate swaps was from C. L. Overman, a vice president of Morgan Keegan who assured officials that the deals carried little risk, city and county officials said.

"He told us it would be a good thing and there wasn't much downside," said Mayor Duncan of Claiborne County.

Then a few months ago, according to the Times, Overman called to tell county officials they had a few weeks to refinance an $18 million bond or pay a quadrupled quarterly payment of $700,000. Perhaps unsurprisingly, Morgan's swap school curriculum understated such risks, and the Times has the textbook to prove it. The big risk factor they missed? It's a familiar one: