The School District of Philadelphia Dismissed Staff to Save Money to Pay for Swaps

A. Rashad Abdel-khalik

Chapter 12 in Brazen:Big Banks, Swap Mania and the Fallout, 2019, pp 195-200 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The Commonwealth (State) of Pennsylvania gave public schools mixed signals in connection with financing policies. In 2002, the state took over the management of the School District of Philadelphia, but in 2003, Pennsylvania’s Act 23 gave the school district the authority and the freedom to issue debt and enter into derivative contracts with insignificant oversight. On March 25, 2004, the School District of Philadelphia (SDP) entered into three qualified interest-rate-management agreements for notional amounts of $55.7 million (see Exhibit 1). However, no money changed hands at the start. Shortly thereafter, with the issuance of its general obligation refunding bonds, Series B of 2004, SDP terminated these interest-rate-agreements and settled for paying a termination loss of $39.1 million. This termination fee amounted to 71% of the notional amount and it is difficult to think of any good reason that would compel SDP to terminate the contract and pay that much termination fee or penalty…

Keywords: Swaps; Interest Rate Swap; Unconscionable Contracting; Termination Penalties; Embedded Costs; Paying for Nothing; Gambling; ISDA; Master Agreement; Deceit; Inadequate Disclosure; Hidden Costs; Zero Sum Game; Wealth Transfer; Paper Chasing Paper; Floating Rate; Synthetic Rate; Credit Risk; Demonstrations; Water Shut Off; Union Class Action Suit; The LIBOR Scandal; Non-Profit (search for similar items in EconPapers)
JEL-codes: E43 E44 (search for similar items in EconPapers)
Date: 2019
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