A complex financial strategy that was supposed to save Philadelphia money on bonds it sold investors in the mid-2000s could end up costing the city up to $186 million, compared with what issuing simple fixed-rate bonds would have cost, city treasurer Nancy Winkler told City Council members at a hearing Tuesday organized by Jim Kenney (D., at-large).
According to testimony from Winkler and other experts, the city arranged interest-rate swaps with Wall Street banks in exchange for up-front cash and to protect taxpayers from the risk of rising interest rates.
Instead, the city found itself owing millions to the banks and its clients when interest rates fell, bond insurers failed, and financial markets froze in the crisis of 2008. Some swaps contracts lacked cancellation clauses, boosting the city's costs.
Whose idea was this? Kenney wanted to know. "We found it very difficult to find the documentation I would like to have seen, about why the city entered into swaps," said Winkler, a Mayor Nutter appointee who previously worked for Philadelphia-based Public Financial Management (PFM), financial adviser to Philadelphia under Nutter and to other communities across the U.S.
Where are the people who recommended that Philadelphia buy swaps? "The city's prior swaps advisers, the principals, were convicted and are mostly either in prison or awaiting sentence," Winkler said.
Winkler later confirmed she was referring to CDR Financial Products Inc., a Beverly Hills-based firm, and its founder, David Rubin, who pleaded guilty to federal fraud and conspiracy charges last winter after being charged with criminal bid-rigging by prosecutors in New York. Rubin is awaiting sentencing, along with at least three of his former employees, on those charges, which did not focus on Pennsylvania transactions. Rubin was a financial backer of former Pennsylvania Gov. Ed Rendell, who named Rubin to his Harrisburg transition team and signed the 2003 law extending the use of swaps by towns in the state.
"I just don't understand the lack of anger," Kenney said, as activists from Fight for Philly and other groups critical of banks applauded. "If this was a doctor, we'd be suing for malpractice."
Councilman Bill Green (D., at-large) was eager to minimize the losses to the city by noting they would be folded into new bond sales.
Green also said it was unfair to blame swaps alone because, as Winkler testified, the city also wasted millions on bond insurance that it was unable to collect, among other factors that contributed to the losses from the swaps-related deals. State Auditor General Jack Wagner also testified, calling swaps inappropriate for municipal governments.
Winkler said total swaps losses could be reduced if interest rates rise in the future. The Federal Reserve has said it intends to keep U.S. interest rates at near-record lows until unemployment drops significantly.
H2L2, the Philadelphia architectural firm that designed the Benjamin Franklin Bridge and a long list of university and corporate projects, is combining into Nelson, a Philadelphia-based firm best known for helping Bank of America and other merger-prone multinationals consolidate their office space.
Architects have been merging in response to weak construction demand and rising insurance and marketing costs. H2L2 and Nelson are seeking college deals in the U.S. and the developing world. H2L2 senior principal Barry N. Eiswerth told me he kept talks secret for 18 months. "We are complementary, and we've known [Nelson] for years," he said.
The combination is the latest in a string of 17 Nelson additions, mostly of firms like H2L2 with sales of $4 million to $6 million a year, since second-generation boss John "Ozzie" Nelson Jr. took over 10 years ago. Nelson will pay H2L2 principals an undisclosed amount of cash as the firm meets sales and performance targets over the next few years.
H2L2 traces its roots to Philadelphia architect Paul Philippe Cret, who started his practice in 1907. With H2L2, Nelson will boast 32 locations and 400 professionals worldwide, making it the third-largest in the U.S., and able to compete for jobs anywhere, Ozzie Nelson told me.