58% of U.S. Colleges Have Interest Rate Swaps on their Books
A new report by the Roosevelt Institute has found that U.S. colleges have lost $2.7 billion to Wall Street. The losses stem from the widespread purchase of rigged derivatives known as “interest rate swaps” in the last 10 years. All told, the report estimates that 58% of colleges currently have a swap on their books.
This week, Time Magazine covered both the new report and my own research:
College losses on interest rate swaps stem in part from illegal LIBOR rigging. Following our 2012 report, the University of California filed the largest American lawsuit to date to recover losses from LIBOR rigging, including losses associated with interest rate swaps. UC’s LIBOR/interest rate swap lawsuit won a preliminary victory this May in a U.S. appeals court.
UC originally pursued a more aggressive program of borrowing prior to 2008 on the premise that interest rate swaps were a complex but supposedly lower-risk hedge on variable rate borrowing. The 2008 market collapse and LIBOR rigging, however, radically drove up payments required from UC to the investment banks issuing the swaps. Ironically, this locked UC into paying much higher debt service costs than could have been achieved with conventional fixed rate canadian online casinos bonds which can be refinanced when interest rates fall.
The new report lays the groundwork for further research on why some colleges turned to risky and ultimately costly financial strategies such as those involving interest rate swaps.
Did the rising representation of financial elites on university boards give rise to a culture of risk taking and little understood financial “innovations”? Did state funding crises make universities more open to exotic financial strategies for investments to boost tuition and commercial revenue?
These are central questions for research that Roosevelt and I are currently undertaking.