Crider

Case study of employment results of a large ICE raid on a poultry plant

The Wall Street Journal ran an informative article today on the effect of a major ICE raid upon employer – employee relations. Evan Pérez and Corey Dade wrote the article. I posted on the raid of Crider Inc., a Stillmore, GA, poultry plant in May, 2006. The WSJ article describes the before and after:

BEFORE: employees mostly Hispanic. Workers provided company housing. Black employment since late 1990s had declined from 70% to 16%. High productivity, poor benefits and working conditions, and few employee complaints. Wages barely above minimum wage. Parking lot wage payments, in which checks were issued and immediately cashed by the employee, preventing any record of employment history. I infer that worker savings probably sent to Mexico.

AFTER: Wages increased 30% - 50%. Workforce is 65% black, 30% white, 5% Hispanic. Workers provided company housing. Much of workforce converted to independent recruiting contractor status and/or engaged through employee hiring firm. Productivity sags 10%. More complaints about worker health and safety. Labor shortages. Company searches across U.S. for people willing to work, such as Hmong migrant workers. I infer that worker savings now put into local housing, cars.

NATIONALLY, WHAT A GUEST WORKER PROGRAM WOULD DO: Boost wages by at least 30%. Prohibit independent contractor abuses. Better health and safety. Remove vulnerability of Hispanic workers to fear of deportation. Worker shortages. More investment in technology to reduce workforces.

Excerpts from the article, with some notes by me:

Do immigrant workers lower pay and working conditions? At Crider, yes. -- PFR

The sudden reversal of economic fortunes in Stillmore underscores some of the most complex aspects of the pitched debate over immigration: Do illegal immigrants take jobs from low-skilled American workers? The answer in Stillmore initially appeared to be yes.

But in the months since Crider began hiring hundreds of African-Americans, the answer has become more complex. The plant has struggled with high turnover among black workers, lower productivity and pay disputes between the new employees and labor contractors. The allure of compliant Latino workers willing to accept grueling conditions despite rock-bottom pay has proved a difficult habit for Crider to shake, particularly because the local, native-born workers who replaced them are more likely to complain about working conditions and aggressively assert what they believe to be legal pay and workplace rights.

The company was "taken aback" when federal agents showed up in May asserting that about 700 of its workers were suspected of having false work documents, Mr. Purtle says. Two Crider employees were among four men arrested for allegedly running a document mill, churning out fake green cards and other fake documents.

The story of Germaine Royals, an African-American, who was hired then fired by Crider -- PFR

For Mr. Royals, the new opportunities at Crider amounted to a windfall after months of erratic work through a temporary labor agency. A high-school dropout who earned his General Education Diploma two years ago, Mr. Royals previously worked nights at a succession of factory jobs. He had just been laid off for the second time in a month when Ms. Germain Paulk came home with word of the Crider recruiter.

Mr. Royals went to Crider with a plan to work as many hours as possible -- he sometimes worked 17 hours a day -- and earn enough to save for a new home and pay off bills. His wife recently took a full-time job as a private nurse for an elderly woman and attends classes at a technical college to earn a license as a practical nurse.

But for some of the African-American workers who surged into the plant, the unexpected chance to work at Crider didn't turn out well. They described long, arduous schedules, alleged health and safety hazards, and unrelenting supervisors. A Crider spokeswoman says the allegations are the sentiment of "people who are not intent on working."

Payroll abuse by Crider – PFR:

Since the illegal immigrants were run out of the plant, Crider no longer directly employs many entry-level workers. Instead, Mr. Royals and many others are classified as independent contractors, working under an agreement between Crider and Allen Peacock, an African-American owner of a recruiting business.

Every Friday, Mr. Peacock pulled into the parking lot of the dormitory complex and handed out checks, most of which he cashed on the spot -- leaving his employees with no documentation of how much they received in wages or paid in taxes, according to several workers.

After a few weeks on the job, Mr. Royals and other black workers claimed Mr. Peacock was short changing them on hours worked. They said taxes were being deducted even though workers never filled out federal and state tax forms. At one point, Ms. Paulk, Mr. Royals's wife, telephoned Mr. Peacock and demanded an explanation about the paychecks.

Mr. Peacock denied mishandling their wages. "Everybody has to pay taxes," he said in an interview. Mr. Peacock said his workers were all being fully paid and that their taxes were properly collected.

Despite his frustrations, Mr. Royals vowed to keep working. But one morning, Mr. Peacock arrived at the Crider dormitory complex and several workers gathered to register their complaints about wages. In front of the other employees, Mr. Royals says, Mr. Peacock fired him.

Since the raids, African-Americans have made up about 65% of Crider's work force, while whites are 30% and Hispanics 5%, according to the company. Turnover has been high. The population of workers hired since last September's immigration raids has turned over three times, according to Crider.

Workers shortage persist -- PFR

Still struggling to fill its ranks, Crider began busing in felons on probation from a state prison and residents of a homeless mission from nearby Macon. Crider also hired another labor contractor who specializes in Hispanic workers. But Crider is still about 300 people short of its work force before the immigration raids. It is now bringing Laotian Hmong immigrant workers and their families from Minnesota and Wisconsin, with hopes that they'll stay on the job and build new roots in Stillmore.

Posted by Peter Rousmaniere on January 17, 2007 11:20 AM | Permalink

Crider a year later

Morning Edition, May 29, 2007 · The Crider poultry-processing plant in Stillmore, Ga., lost two-thirds of its work force last year after a federal immigration agency raid.

Since then, Crider has scrambled to replace the employees. It has staged job fairs, boosted starting pay and even contracted for Georgia prison inmates to work on its production line. In an unusual experiment, Crider has also recruited a small group of Laotian Hmong refugees to move from Minnesota to Georgia, hoping they'll start a new community.

Dao Moua was an employment specialist at a Hmong-American Association in Minneapolis when he got the call from Crider. It turned out Moua had already decided to retire somewhere warmer. Although it appears that no other ethnic Hmong live in this swath of rural Georgia, he took a liking to the place.

"I love it," he says. "It's not much different from Laos. The weather is very close, and the grass, the trees — they have bamboo."

Mass Migration

Moua came to America in 1979 after the U.S. granted refugee status to thousands of Hmong in Laos because they'd helped the CIA against the North Vietnamese. Having already re-made his life once, he was well prepared for the move to the South.

In February, Moua and 20 extended family members rented a large trailer for their belongings and drove for three days. Moua's wife, Tong, brought a supply of Asian spices and a whopping 500 pounds of Jasmine rice.

Their new life is lonely. Stillmore has one blinking yellow light and a couple of gasoline stations. There are two Mexican food stores that used to bustle with workers from the plant. But since last year's immigration raid, one has closed, and the other is only open a few hours a day, its shelves half empty.

"The employers around here are still afraid of hiring Hispanics," says Baptist pastor Ariel Rodriguez. "They're afraid that immigration agents are coming, the workers are going to disappear, and they'll have to pay fines."

Officials at Crider Inc. declined to give an interview or offer any information about plant productivity or their efforts to fill the jobs left vacant last year.

Making a New Life

The new Hmong employees have found a refuge 20 miles up the road, in the county seat of Swainsboro. They do nearly all their shopping at the Wal-Mart there, and eat regularly at the Peking Super Buffet Restaurant. It's hardly authentic — the spread includes pizza next to the dumplings — but Dao Moua says it's the closest he can find to his native cuisine.

Moua's job is to recruit as many Hmong as he can, and in recent weeks, two families arrived from Northern California. Wang Soung helps operate a machine that plucks feathers from chickens. Soung says he's eager to build a new community in Georgia, but he misses the large Hmong population he left.

"All my friends, my community, the Lao veterans," he sighs. "I was the leader of one group, but I just threw that away!"

Soung's 24-year-old son, Fong, sits next to him sullenly. He says the work on the production line is hard, but the worst part for him is being bored outside the plant.

"There's nothing to do. I play basketball, and watch movies and stuff — that's all," Fong says.

Tong, Moua's wife, works at the plant checking labels on cans of chicken. She has taken homemade egg rolls to work and says her colleagues are friendly. She is even trying to pick up on the local Southern drawl.

"I say, 'See ya'll another daaaay,'" she laughs.

'It's Not Fit for Everybody'

But not everyone in the Hmong community supports this new venture. One activist in Wisconsin worries that his fellow Hmong will be taken advantage of — which he believes was the case with the illegal Mexican workers they replaced. Economically, Dao Moua says it's a wash — the pay is lower in Georgia, but so is the cost of living. He says he doesn't push anyone to come.

"Some like it and some don't," he says of food processing. "It's not fit for everybody."

Moua has put his Minneapolis home on the market and hopes more Hmong families there will move to southern Georgia once the school year is over. Then, he says, they could get someone to open a decent Asian food store. But long-term success will depend on the younger generation.

"Fortunately, I'm not a big-city guy. I'm more a countryside guy, where it's quiet," says Tong Moua, 22, a relative Dao considers like a grandson.

Tong Moua has gelled hair and sports a Bluetooth phone headset. He and his brother both left wives and children in Minneapolis to try a new life in Georgia.

"It is a big move," he says, "but sometimes in life, you have to take the risk in order to find out the result."

Tong Moua's family is waiting for word from him. If he likes the job at the processing plant, and life in Georgia, they say they will all join him, even his father. So will he tell them to come?

"I can't say. It has only been three months," he says. Not long enough, he says, for such a momentous decision.

It’s all part of the culture we have…

Marlborough - During one frigid day last month, Code Enforcement Officer Pam Wilderman took a call from an anxious Milham Street resident, who reported that an uncontrolled flow of water was pouring out from a neighbor’s home.

Wilderman, police and firefighters rushed to the scene, and the Water Department shut off the home’s water supply.

Later, Wilderman found out that the home – purchased seven years ago for $438,000 – had been foreclosed. Its former residents had left town without shutting off the water.

Today neighbors are facing the prospect of the home being abandoned and unkempt for a long time.

“Now there’s a potential mold problem,” Wilderman said. “Nobody can live in it until it’s been properly inspected and mitigated.”

In upscale as well as downtrodden neighborhoods around Marlborough and Hudson, foreclosures have been on the rise, causing anguish for the neighbors as well as the homeowners and stressing community services. Wilderman said she and other city services visited nine foreclosed properties in November alone.

“The problem is not just in French Hill,” she said. “It’s hitting all over the city. More and more people are just walking away from their homes when they’re foreclosed.” And until a new owner takes possession, she added, “nobody pays attention to the house.”

ForeclosuresMass, a web site that tracks foreclosures by community, reports that 111 Marlborough properties started the foreclosure process over the last six months. They include properties on Lincoln Street, Boston Post Road, Leoleis Drive, Priscilla Drive, McGee Avenue, Conrad Road and many other locations. ForeclosuresMass says that only 27 Massachusetts communities have more foreclosures than Marlborough.

In Hudson, ForeclosuresMass reports 28 properties have started the foreclosure process in the last six months, ranking it 65^th in the state in the number of foreclosures. The properties are on Manning Street, Richard Road, Stow Court, Davis Road and other locations.

Banker and Tradesman, a publication that tracks real estate sales and foreclosures, reports that foreclosures nearly quadrupled in Marlborough between 2005 and 2007, to 59 last year. In Hudson, the number of foreclosures went from 1 in 2005 to 23 last year.

People who are watching the process blame financial institutions who misled unsophisticated buyers, and starry-eyed homeowners who bought more than they could afford with no money down.

Marlborough Savings Bank Vice President Jeff Dale said some recent immigrants have sought refinancing help from his bank after they secured risky mortgages from other sources. The bank has a loan officer, Paula DiGregorio, dedicated to helping Spanish-speaking people who are burdened with now-unmanageable mortgages.

“A lot of people got into sub-prime mortgage situations where they financed 95 or 100 percent of their properties,” Dale said. “Now, what they owe is equivalent to 105 or 120 percent of what their property is worth, and there’s very little we can do in cases like that.”

“We help as much as we can,” said Dale. “But if people are ‘upside down’ in a loan – owing more than a home is worth – we can’t do very much.”

Dale blames unscrupulous lenders who prey on lower-income people. “You can’t sell a $300,000 loan to someone who’s making $15,000 a year,” he said.

Vince Valvo of The Warren Group, which publishes Banker and Tradesman, said that foreclosure trends in Marlborough and Hudson mirror that around the state and the country. While all types of neighborhoods are hit, Valvo said that poorer neighborhoods tend to suffer the most.

“In communities with lower income residents and neighborhoods with older homes, we tend to see more of these foreclosures,” Valvo said. “Lower income residents have tended to take out riskier loans, that later reset at rates that they can no longer afford.”

But he added that people of all income levels have lost homes that they could not afford in the first place.

“People who decided to really stretch and buy the biggest house they could afford with as little down as possible are also in trouble,” Valvo said. “It could be the guy down the street driving the Lexus. He’s got a pool and a car but he’s in debt up to his ears.”

“It’s all part of the culture we have…that it’s our right to be living not just in a home, but a home with granite countertops, three bathrooms and tons of garage space,” Valvo said.

City Councilor Peter Juaire, whose ward includes some of Marlborough’s less wealthy neighborhoods, also agrees that the problem cuts across economic lines.

“Marlborough is a combination of white collar and blue collar, and we all know that the economy is not in the best condition,” said Juaire. “People are losing their jobs, after they bit off more than they could chew when they bought their homes. Some who bought an adjustable rate are now getting hit with a $300 a month increase. Their costs for gas and fuel are also going up. Everything’s going up except salaries.”

And both Wilderman and Juaire agree that foreclosures have led to more troubled properties and, in turn, troubled neighborhoods.

“Some people just walk away after their homes are foreclosed,” said Juaire. “If they don’t winterize, the pipes can break. Sometimes the home gets vandalized.”

Wilderman said she has seen first-hand how neighbors suffer from a neglected, foreclosed home. She took a complaint a year ago about a crowded home on Ridge Road, which she described as a “solid, middle class Cape Cod type neighborhood where everybody keeps up their yard.”

After the home changed hands, “there was suddenly a lot of traffic going in and out of it,” Wilderman said.

“I found out that the owner of the home had been able to purchase a $340,000 home with no money down,” she said. “The very next day he closed on another house on Barnard Road for $500,000, again with no money down.

“Now tell me that person didn’t know what he was doing. Both of those homes ended up in foreclosure within 18 months.”

SocGen in disarray as judges throw out fraud charge against trader

· Bank admits it was warned on more than one occasion
· Shareholders go to court over alleged insider dealing

• David Gow and Emilie Boyer King in Paris
• The Guardian,
• Tuesday January 29 2008

Contact us

Close

• Contact the Business editor
  business.editor@guardianunlimited.co.uk

• Report errors or inaccuracies: reader@guardian.co.uk
• Letters for publication should be sent to: letters@guardian.co.uk

• If you need help using the site: userhelp@guardian.co.uk
• Call the main Guardian and Observer switchboard:
  +44 (0)20 7278 2332
• • Advertising guide
  • License/buy our content

About this article

Close

This article appeared in the Guardian on Tuesday January 29 2008 on p24 of the Financial section. It was last updated at 08:08 on January 29 2008.

The Société Générale affair descended deeper into the mire last night as investigating judges threw out the most serious accusation, attempted fraud, put forward by prosecutors against the trader behind the €4.9bn losses, Jérôme Kerviel.

They released him under judicial supervision, or bail, after two days of police questioning, leading his lawyers to claim a substantial victory. The surprise threatened to undermine the bank's increasingly fragile defence that he had used ingeniously fraudulent devices, including hacking into colleagues' internet codes, to hide his gambling on equity derivatives trading markets.

Kerviel ran up an exposure of €50bn, costing France's second-largest bank a record loss in banking history as it unwound his positions last week. The prosecutor's office, which wanted to charge him with fraud, said it would appeal against the release. He has been placed under formal investigation for lesser allegations of breach of trust, computer abuse, and falsification. "There is no fraud," said Christian Charriere-Bournazel, one of Kerviel's two lawyers, accusing Daniel Bouton, SocGen's chief executive, of "throwing him to the dogs" and "holding him up for public vilification."

Earlier, a lawyer acting for 100 small shareholders sued the bank over insider trading and market manipulation, and minority investors accused it of issuing misleading information.

And Kerviel, depicted by the bank as a "lone" rogue trader, also increased SocGen's woes by accusing his colleagues of having similarly traded beyond their limits. Prosecutors said the bank had been alerted by the Eurex derivatives market to the scale of his positions as long ago as November last year.

Prosecutor Jean-Claude Marin said Kerviel had been able to fool his employer by producing a fake document to justify the risk cover - a comment seized upon by SocGen as it struggled to defend itself against charges its controls were so extraordinarily lax that Kerviel acted unapprehended for 15 months.

Eurex said its controls "functioned correctly at all levels, also in this case", while Socgen admitted it had been warned by the Deutsche Boerse subsidiary more than once. "There were false trades picked up but he [Kerviel] explained them away, justified them, or fabricated covers."

An enraged Colette Neuville, head of Adam, a minority shareholders' lobby, disclosed she had asked the AMF, the French financial services authority, for a formal inquiry into alleged insider trading by a director and/or others at the bank. She also wants the AMF to investigate whether the bank deliberately misled investors over its sub-prime losses in November when it put them at €230m, only to announce a €2.05bn hit two months later. She told the Guardian. "There are strong possibilities that the information given to shareholders was incorrect - misleading."

The lawyer, Frederik-Karel Canoy, said he had begun legal action against SocGen over how it unwound billions of euros in allegedly fraudulent share deals last week. The bank said on Sunday it unwound Kerviel's positions, €50bn, "in particularly unfavourable market conditions" between Monday and Wednesday last week after discovering them on January 18.

Canoy, a thorn in the flesh of French companies, told Reuters the bank should have told markets about its pending losses before its huge three-day selling spree.

SocGen says it unwound these positions in a controlled manner and within a volume limited to less than 10% to "respect the integrity of markets". It won support from Bank of France governor Christian Noyer: "The way Société Générale has handled its affairs to unwind positions in a very short space of time, and without moving the markets, contrary to what has been said, because they remained within normal trading limits ... was very professional."

Canoy also filed a complaint about the sale of 1m shares by SocGen director Robert Day on January 9 and 10, disclosed in AMF filings, shares worth €85.7m in his own name, and €8.63m and €959,066 from two foundations "linked" to him.

The bank said the sale had come "well before" it knew of any fraud, while sources, dismissing Canoy's move as a stunt, insisted that only a few senior officials, excluding Day, could have known of pending losses when he sold his shares.

But Neuville, in a letter to the AMF, insisted that share sales had taken place just before Socgen shares started to slide on January 14 - or four days before Kerviel's fictitious and fraudulent dealings were first detected inside the bank on January 18. "There are people who had access to information that was not publicly known; there's a suspicion of insider trading, and there must be a formal inquiry."

Kerviel has admitted hiding his activities but accused colleagues of trading beyond their limits, Marin said earlier.

Prosecutors had sought charges against Kerviel for offences of forgery and fraud, with a sentence of up to seven years.

Marin said the 31-year-old, who gave himself up on Saturday, had told investigators that his and other irregular deals had taken place since the end of 2005, a dagger at the heart of Socgen's defence that he was a one-off fraudster of genius.

Marin said the investigation had shown Kerviel did indeed act alone - to prove himself a star trader and earn a bonus of €300,000, rather than to harm the bank.

The bank has so far dismissed two managers over the scandal: Luc François, head of equity derivatives trading, and Jean-Pierre Lessage, Kerviel's direct manager.

Troubled homeowners: Can't pay? Just walk away

More and more borrowers are watching their house values sink while the cost of their loans skyrockets. What to do? Skip out on the mortgage all together.

By Les Christie, CNNMoney.com staff writer

February 6 2008: 10:21 AM EST

NEW YORK (CNNMoney.com) -- Mortgage payments are set to jump. Home prices have plunged. "I'm outta here."

Homeowners are abandoning their homes and, more importantly, their mortgages, rather than trying to keep up with rising payments on deteriorating assets. So many people are handing their keys back to lenders that a new term has been coined for it: jingle mail.

"I stopped paying my mortgage in October, after shelling out about $70,000 in interest [over 15 months]," said one borrower, David, who doesn't want his last name used. "Now, I'm just waiting for the default notice."

The Los Angeles-based writer bought two properties in Hancock Park, west of downtown, using no-down, interest-only mortgages in 2006. He paid just over $1 million for both.

David had planned to sell them quickly but got caught in the slump. Soon his interest rate will jump by a few points, and his payments will go up by several hundred dollars a month for each place. He figures his properties have fallen in value by at least $60,000 each.

Current lending practices have created an environment where a measure as extreme as abandoning a home actually makes sense to some people.

Many buyers put little or no money down, so they don't have much invested in them. That leaves them with little incentive to keep making payments when a home's market value dips below the balance of the mortgage.

The most serious consequence is a tremendous hit to credit scores. For some, that's better than throwing away money they'll never recover by selling their home.

And while a mortgage default can savage a person's credit record, trying to pay off a loan they can't afford could be worse for borrowers if it leads to bankruptcy, said Craig Watts, a spokesman for the credit reporting firm Fair Isaac.

Credit scores are hurt much more by missing multiple payments - on credit cards, cars and so on - than by a single foreclosure.

"The time it takes to regain your credit score [after foreclosure] can be shorter than after bankruptcy," said Watts.

It typically takes three years of a spotless payment record after a bankruptcy before credit scores recover enough for someone to think about buying a home again, he said. After abandoning a mortgage, a person may be able to buy a new house in two years or less.

And now skipping out on a home is easier, thanks to the Mortgage Debt Relief Act of 2007. Previously, if a bank sold a foreclosed home for less than the mortgage balance and it forgave the difference, the borrower had to pay tax on that difference as if it were income. Now the IRS will ignore it.

"That's going to help a lot of people," said Mike Gray, a San Jose accountant who runs the web site Realestatetaxletter.com.

The trend of walking away is most pronounced among real estate investors, according to Jay Brinkman, an economist with the Mortgage Bankers Association (MBA).

But families are doing it too. "If they have to stretch to make mortgage payments for a home that will not recover its value, then yes, they may walk away," he said.

Often they chose hybrid adjustable rate mortgages (ARMs) that came with low initial payments. After a few years, interest rates on these loans reset higher. But buyers thought they could count on the increased value of their homes to refinance into affordable, fixed-rate loans.

Now, that may not be possible. Take Susan (not her real name), a client of HouseBuyerNetwork.com, which specializes in arranging short sales. A short sale is when a bank agrees to accept the sale price paid for a home - even if it is less than the outstanding mortgage on it - as payment in full. An owner might sell a house with a $200,000 mortgage for $180,000, and then the bank forgives the difference.

HouseBuyerNetwork.com CEO Duane LeGate says that Susan's two-bedroom condo in Sonoma County is worth $340,000, but the mortgage balance is $380,000. She can't refinance and it's difficult to sell.

She's still trying for a short sale but, said LeGate, "She'll almost certainly end up walking away."

Beyond anecdotes, some statistics indicate that hard-pressed owners are deliberately courting foreclosure. An analysis by the consumer credit rating agency Experian last spring found that many borrowers were choosing to pay off credit card and other consumer debt before making mortgage payments. They were electing to put their mortgage at risk rather than their credit cards or auto loans.

Similarly, Richard DeKaser, chief economist for National City Corp., (NCC, Fortune 500) notes that while all credit metrics are deteriorating, mortgage delinquencies are rising disproportionately. "That makes sense if people are choosing to walk away," he said.

And now reports are emerging of homeowners skipping out on mortgages even though they can still afford to pay them.

Wachovia (WB, Fortune 500) CEO Ken Thompson described these people on an earnings call last month."[These are] people that have otherwise had the capacity to pay, but have basically just decided not to, because they feel like they've lost equity, value in their properties."

Lenders are afraid that borrowers may find it's worth the hit to their credit scores, if they can drastically reduce their housing expenses. Someone with good credit and a $600,000 home in a town with cratering real estate prices could buy a similar house nearby for $450,000, and then let the other $600,000 mortgage go into foreclosure.

The stage is set for this kind of thing particularly in California, where huge numbers of buyers used low or no-down deals to buy homes. The trend has even spawned at least one new business, San Diego-based YouWalkAway.com, which for a fee of $1,000 purports to guide clients through the process of ditching their mortgages. It launched in early January, and says it has already signed up 180 clients.

California is a bit of a safe haven for these borrowers, since banks that repossess and then sell a foreclosed property for less than the mortgage that was owed on it cannot come after borrowers for the difference - as long as it's the initial mortgage, one that has not been refinanced. So if a borrower owes $200,000 and the bank sells the house for $170,000, the borrower comes out of it debt-free.

And for many homeowners, the prospect of becoming debt-free is growing increasingly alluring.

Home equity loan defaults soar

Ryanair ordered to pay damages to steel band ‘terrorists’ thrown off jet

Alexi Mostrous

To most of the passengers on the Ryanair Flight from Sardinia to London, the five black men sitting quietly in the economy cabin were nothing more sinister than fellow passengers.

But to the psychology professor seated near them, they could only be terrorists. For one thing, they were sitting apart – when they had been together in the departure lounge – which could only be suspicious. Worse, one of the group acted as if he was blind but was reading newspapers and magazines. Or at least, that’s what it looked like to him. After he went to the pilot saying the aircraft was in danger, Captain Sam Dunlop had the men removed from the aircraft.

The five members of Caribbean Steel International were awarded £1,116 each in damages yesterday after a judge found that they had been removed unreasonably. Far from being terrorists, they were returning from a music festival in Sardinia.

The court heard that the musicians were not sitting next to each other because the flight was full. The band’s drummer, Michael Toussaint, was indeed blind and one of the other band members had been reading the football scores to him from a newspaper while they waited for take-off.

Captain Dunlop decided to remove the men, the only black people on the flight, after two families and a stewardess said that they would not fly with them on board.

Summing up at the Mayor’s & City of London Court yesterday, district judge Roger Southcombe said that the five claimants had been scared and embarrassed when Italian police armed with guns boarded the aircraft to take them off. Although they were later cleared by the airport’s security, the men had not been allowed to reboard the Ryanair flight. The judge said that Captain Dunlop had adopted a “zero tolerance” approach, despite being informed by the airport authorities that the band posed no threat. “[Captain Dunlop] considered that he must enforce that policy even though the residual fears of a few passengers and crew were, he must have known by then, irrational,” the judge said. “Just because a passenger was black or someone did not like the look of him or her, it [was] not be acceptable to offload that passenger.” The decision left the group stranded in Sardinia and unable to see their families on New Year’s Eve. The first available flight back to Britain on New Year’s Day was to Liverpool. The men could not find a hotel when they arrived in the city and had to spend the night at a bus station, sleeping on their instruments. They only got back to London on January 2.

Jason Constantine, 43, a member of the band, said yesterday: “We were utterly confused when we were marched off the plane by armed police and then we were angry when they wouldn’t let us back on. We were told nothing by the airline or the pilot.

“The least you would have expected in this situation was an explanation and an apology, but that wasn’t forthcoming.”

Normally, damages for being denied boarding are limited to £250, but the judge said that the group’s “embarrassment at being the only black persons removed from the aircraft at gunpoint for no just reason, their inability to be with their families and friends on New Year’s Eve and New Year’s Day, the overnight stay in the cold of Liverpool, [all] had to be taken into account”.

Ryanair had also lied about the incident to the press. Peter Sherrard, the airline’s head of communications, had told newspapers that “airport security were informed and decided to remove the group”, and that “no request was made to our pilot to allow this group to reboard”. This was “false and misleading”, the judge said.

Phillip Marshall, QC, representing the band, heard about the case while listening to In Touch, a Radio 4 programme about disabilities. “It was an extraordinary case. Ryanair decided to fight it tooth and nail. Any other sensible airline would have realised they should have paid compensation,” he said.

A spokesman for Ryanair said last night that it would appeal against the decision.

Kerviel: ‘I will not be made a scapegoat’

By Ben Hall in Paris

Published: February 5 2008 14:33 | Last updated: February 5 2008 14:33

Jérôme Kerviel, the trader accused of fake transactions costing Société Générale billions of euros, insisted on Tuesday he would not be used as a “scapegoat” by the bank.

In his first public comments since the scandal broke, Mr Kerviel told Agence France Presse he recognised his “share of the responsibility”, but he would not take all the blame.

”I was designated [as being solely responsible] by Société Générale. I accept my share of responsibility but I will not be made a scapegoat for Société Générale,” the 31-year-old former bank employee said in an interview at his lawyer’s office in Paris.

Mr Kerviel’s first public intervention came a day after he was questioned by two investigating magistrates who are examining the case. Judges Renaud van Ruymbeke and Françoise Desset grilled Mr Kerviel for eight hours on Monday, AFP reported.

Mr Kerviel was charged last month with ”breach of trust”, ”falsifying and using falsified documents” and ”breaching IT controls access codes” during his time as a trader on SocGen’s equity derivatives desk in Paris.

The bank said it incurred net losses of €4.9bn as a result of an unhedged futures exposure worth close to €50bn ($74bn) built up by its former trader.

Fiscal Conservative? an oxymoron

A LOOK AT SPENDING DURING THE BUSH PRESIDENCY

This shows the amount of spending and the size of the deficit during President Bush's two terms in office, how the president proposes to allocate the federal budget in his last year in office and the administration's track record in estimating the federal deficit from fiscal year 2002 through fiscal year 2007. The president's spending request to Congress is the first step in a lengthy budget process. Fiscal year 2009 begins Oct. 1, 2008. Bush's proposed 2009 spending: Total $3.1 trillion Discretionary spending $1.2 trillion Defense and Homeland Security: $730 billion Discretionary domestic programs: $482 billion Mandatory spending $1.6 trillion Social Security: $644 billion Medicare $408 billion Medicaid and SCHIP $224 billion Other $360 billion Net interest: $260 billion Federal budgets, deficits during the Bush years 2002 Spending: $2.01 trillion Deficit: $157.8 billion 2003 Spending: $2.16T Deficit: $377.6B 2004 Spending: $2.29T Deficit: $412.7B 2005 Spending: $2.47T Deficit: $318.3B 2006 Spending: $2.66T Deficit: $248.2B 2007 Spending: $2.73T Deficit: $162B 2008 (estimated) Spending: $2.93T Deficit: $410B 2009 (estimated) Spending: $3.11T Deficit: $407.4B Comparing deficit estimates Estimated deficits in Bush's original budget, compared with what the actual deficits turned out to be: (in billions) 2002 Estimated deficit or surplus: $231.2 Actual deficit: -$157.8 2003 Estimated deficit or surplus: -$80.2 Actual deficit: -$377.6 2004 Estimated deficit or surplus: -$307.4 Actual deficit: -$412.7 2005 Estimated deficit or surplus: -$363.6 Actual deficit: -$318.3 2006 Estimated deficit or surplus: -$390.1 Actual deficit: -$248.2 2007 Estimated deficit or surplus: -$354.2 Actual deficit: -$162.0

8 Years of Bush Deficits

$400 billion deficit to greet Bush's successor

By Richard Wolf, USA TODAY

WASHINGTON — President Bush's proposed $3.1 trillion budget may be dead on arrival in Congress, but the impact of that political deadlock will make life difficult for the man or woman who succeeds him.

The next president will inherit a deficit of about $400 billion, and maybe more. Unless the economy rebounds and revenue pours in, deficits will push the cumulative federal debt past $12 trillion in the next five years.

DEFENSE: Bush seeks $515B to spend on military

AT A GLANCE: Proposals for education, taxes, health, security and more

VIDEO: Bush releases $3.1 trillion budget

He or she will need to spend far more in Iraq and Afghanistan than Bush proposed, because he included only $70 billion — designed to last until Jan. 20, when he leaves office. White House budget director Jim Nussle said Monday that even the cost of drawing down forces is "surprisingly high."

He or she will face the expiration of Bush's tax cuts, passed in 2001 and 2003. While the leading candidates opposed them, allowing any to expire after 2010 will feel like a tax increase and has all its political risks.

He or she will be closer to the projected fiscal crises facing Medicare and Social Security, which lack the tax flow to pay for benefits promised to baby boomers. Bush's call for $208 billion in entitlement savings over five years has no chance in this election-year Congress.

"Congress needs to know that every year they delay, the problem gets harder," Nussle said. "Every year they delay, it becomes closer to the time when this unfunded obligation is actually going to collapse on the country."

CONGRESS: Dems ready for a fight

But delay they will, as they have done every year since 1997, the last time a president and Congress came together to slash the deficit. Helped by a surging economy, the balanced budget measure led to surpluses from 1998 through 2001. Then came a recession, the 9/11 terrorist attacks, wars in Afghanistan and Iraq and hurricanes that devastated the Gulf Coast.

The $407 billion deficit that Bush predicts will greet his successor could be even larger. "Once again, the president has tried to conceal the true fiscal impact of his budget by leaving out large costs," said Senate Budget Committee Chairman Kent Conrad, D-N.D.

The president's budget:

• Counts on a freeze in most domestic spending — an unrealistic proposal for a Democratic-led Congress facing re-election. Proposals such as eliminating the popular COPS street-patrol program or trimming energy assistance for low-income families have little chance of passage.

• Cuts nearly $20 billion in grants to state and local governments for programs other than Medicaid, according to the liberal Center on Budget and Policy Priorities. Members of Congress always come to the defense of their states, particularly when about half of them are projecting budget gaps.

• Counts on imposing the alternative minimum tax on millions of additional taxpayers in future years — something Congress is sure to avoid, at considerable cost. The AMT increases taxes on people with large deductions but has been adjusted every year to prevent being imposed on the middle class. "That is as certain as anything can be in politics," said Stan Collender, a budget expert at Qorvis Communications.

• Relies on a $178 billion reduction in Medicare's projected growth over the next five years, nearly three times the size of his rejected proposal last year. Congress won't go along — yet. Budget experts agree the day of reckoning will come.

"In the long run, the most important part of the budget is the president's challenge to Congress to finally address the unsustainable long-term costs of entitlements," said Brian Riedl of the conservative Heritage Foundation. "The longer lawmakers wait to enact the necessary reforms, the more painful those reforms will be."

All of those policies allow the president to claim that the budget will reach surplus in 2012, lawmakers said. "To think that anyone has the audacity to suggest that the deficit will be gone in five years under the president's plan is almost laughable," said Senate Majority Leader Harry Reid, D-Nev.

Rep. John Spratt, D-S.C., chairman of the House Budget Committee, said a more likely scenario is a deficit that remains in the $200 billion range in 2012. "Far from proposing a plan to fix the budget, the Bush administration proposes policies that worsen it and, with little compunction, leaves the consequences for the next administration and future generations to correct," he said.

STIMULUS PLAN A SCAM TO BENEFIT THE RICH

Higher loan limits will lead to Fannie Mae, Freddie Mac bailout

Sean Olender

Sunday, February 3, 2008

Congress is about to sell us the biggest fraud in American history.

It's been highly touted as an economic stimulus bill that will help millions of Americans - and has the backing of both President Bush and House Speaker Nancy Pelosi. In the coming year, individuals would receive rebates of up to $600 and families up to $1,200. There are other goodies, too, including tax write-offs for small businesses and an expansion of the child tax credit.

But, as the old adage goes, nothing comes for free. As part of the bill, Congress is set to rush through an increase in the mortgage loan limits for Fannie Mae and Freddie Mac (and Federal Housing Administration insurance, too) - from $417,000 to $729,750 - the first step toward a massive financial disaster in which taxpayers will end up paying through the nose.

Here's how we got to this point. Domestic and international investors hold hundreds of billions of dollars in bad debt, because U.S. investment houses sold them junk securities based on often fraudulent mortgages. Many of these mortgages were sold to unqualified buyers under terms that made widespread foreclosures a certainty once the housing market began to fall.

Investment banks and bond rating agencies sat down and tried to figure out how to describe Americans with insufficient incomes and little for a down payment as great credit risks on loans too big for their incomes. The new rules focused on credit scores, because it was a good excuse to avoid looking at income and down payment, factors that would have restricted this moneymaking fiasco.

Now, thanks to Congress, junk bond investors will be able to pawn off their bad debt to Fannie and Freddie, instead of suing the big investment houses for ripping them off. This shift will certainly doom Fannie Mae and Freddie Mac, so don't be surprised if we, the taxpayers, have to bail out poor Fannie and Freddie - to the tune of more than $1 trillion.

Why more than $1 trillion? If Goldman Sachs is correct in its recent projections that home prices in California are going to drop 35 to 40 percent, the state's losses alone would top $2 trillion, because California has a disproportionate number of jumbo loans. The irony here is that the collapse in housing prices could make Fannie insolvent even without raising the loan limit. Increasing Fannie's limit is like going on a spending spree with your credit cards because you know you are going to file for bankruptcy in a few months. Only here the taxpayer is left holding the bag. Our children will pay interest on this debt in perpetuity. It is our debt. It is inescapable.

In the coming months, Fannie and Freddie will buy up mortgages based on old, fraudulent appraisals and on loans with bogus inflated incomes. Unfortunately, many of these loans will still default.

But that's just the start. Brace yourself for another wave of faxes, phone calls and junk mail urging you to refinance at only 1 percent. With zero new regulation, the same bad actors that caused this crisis can once again inflate property appraisals and begin a new cycle of fraud.

There are firms that rent assets to people to help them fraudulently qualify for a mortgage - like loaning them money to keep in their bank account for a couple months so they can fool the lender with documented savings that evaporate the day after the mortgage is signed. Another popular ruse: The borrower pays an employer to pay him a lot of money in a fake job for a month or two so he can show a fat paycheck in his loan docs. Some real estate agents and mortgage brokers actually refer buyers to these services.

Contrary to popular myth, Fannie holds a lot of subprime debt, option ARM debt and other dodgy securities. Fannie and Freddie owned or guaranteed almost 45 percent of all mortgages in America last year. BusinessWeek noted in 2007 that Fannie and Freddie have "moved more prominently into low-documentation loans, which require little or no proof of the borrower's income." Expansion of Fannie and Freddie's reckless lending is exactly what Congress wants because it's plausibly deniable. Teary-eyed lawmakers can take to the airwaves a year from now and declare: "We had no idea Fannie could go under, but we can't cut and run now. We have to bail out Fannie and Freddie for the good of America! It's going to be a tough slog, but you're getting used to those, no?"

Those same lawmakers won't mention the fact that they get paid far more by real estate lobbyists than they do from our Treasury.

I've spoken with borrowers who stopped making mortgage payments seven or more months ago. None has received a default notice. Defaults may be much higher than banks are letting on. The data lags are growing suspiciously long. Nobody knows what's going on. Seven months without making a single payment! Will Fannie guarantee those loans because they aren't in formal default yet? Nobody wants to know, because if they know, they might be called to testify next year. That's why lawmakers want to raise the limits now and ask questions later.

This shortsighted plan poses a terrible risk to every American taxpayer, especially retirees, because Social Security money will be needed to bail out Fannie and Freddie. And even if you live in high-priced San Francisco, Los Angeles or New York - and stand to benefit from the increased loan limit - this is a horrible fraud on you, too, because raising the limit to $730,000 risks a systemic crisis that will cost far more than any temporary rebate check.

In support of the economic stimulus bill, Bush will have to face "working American families" and explain that some of their tax money is going to be spent guaranteeing $730,000 mortgages on $1 million homes. It's like some sort of upside-down communism where the poor pay the rich welfare. Why should taxes from families earning $48,000 a year be used to support expensive mortgages in New York, Los Angeles and San Francisco? Welfare for the hungry and homeless is evil, but welfare for million-dollar homeowners facing a tough refi ... well, that's called "helping the economy."

I can imagine the president's radio address playing in the heartland: "We have some families with million-dollar homes on the coasts who are really hurting and so we need you, the working families of America, to stand together with them and help them avoid the kind of home price depreciation that might leave them without a new Lexus for years."

I guess Congress' hope is that median-income families will be too busy using their rebates to buy much-needed groceries to notice that the rich folk are getting way with a new scam.

Several months ago, economist Nouriel Roubini of New York University's Stern School of Business suggested that the housing market has been effectively nationalized. At first it seemed crazy, but now it's fairly obvious. In August alone, Fannie and Freddie increased their loan portfolios by $62 billion, and the Federal Home Loan Bank by $110 billion. That total of $172 billion would come to just over $2 trillion annually - not much less than the entire federal budget.

Everyone seeking a loan, securitizing a mortgage, and buying or selling a mortgage security will now be dealing, in one way or another, with the U.S. government. This type of intervention is very expensive and will eat everything in its path, including Social Security.

If we're going to have a government-financed intervention, it should be to make sure that Social Security benefits go to those who paid for them, that the poor are fed and housed, or that the army of uninsured receive health benefits. If, as they say, we don't have enough money for those important things, then I think we don't have enough money to bail out banks and bond investors.

Don't let me down, my fellow Americans. Let's vote out anyone0 who dares to vote for this scam.

Sean Olender is an attorney in San Mateo. Contact us at insight@sfchronicle.com.

"It's a form of institutionalized larceny..."

Feb. 1 (Bloomberg) -- James Barker saw no way out. In September 2003, the superintendent of the Erie City School District in Pennsylvania watched helplessly as his buildings began to crumble.

The 81-year-old Roosevelt Middle School was on the verge of being condemned. The district was running out of money to buy new textbooks. And the school board had determined that the 100,000-resident community 125 miles north of Pittsburgh couldn't afford a tax increase. Then JPMorgan Chase & Co., the second-largest bank in the U.S., made Barker an offer that seemed too good to be true.

David DiCarlo, an Erie-based JPMorgan Chase banker, told Barker and the school board on Sept. 4, 2003, that all they had to do was sign papers he said would benefit them if interest rates increased in the future, and the bank would give the district $750,000, a transcript of the board meeting shows.

``You have severe building needs; you have serious academic needs,'' Barker, 58, says. ``It's very hard to ignore the fact that the bank says it will give you cash.'' So Barker and the board members agreed to the deal.

What New York-based JPMorgan Chase didn't tell them, the transcript shows, was that the bank would get more in fees than the school district would get in cash: $1 million. The complex deal, which placed taxpayer money at risk, was linked to four variables involving interest rates. Three years later, as interest rate benchmarks went the wrong way for the school district, the Erie board paid $2.9 million to JPMorgan to get out of the deal, which officials now say they didn't understand.

``That was like a sucker punch,'' Barker says. ``It's not about the district and the superintendent. It's about resources being sucked out of the classroom. If it's happening here, it's happening in other places.''

$12 Billion in Deals

It is. During the past four years in Pennsylvania alone, banks have pitched at least 500 deals totaling $12 billion like the one JPMorgan Chase sold to Erie, according to records on file with the state Department of Community and Economic Development. Most of the transactions -- which occurred outside the state's largest cities of Philadelphia and Pittsburgh -- have been made without public bidding, which means that banks and advisers privately arranged the deals with small school districts, the records show.

JPMorgan's Chief Executive Officer Jamie Dimon declined to say if he thought the bank's fee disclosure was proper and whether the bank acted in a fair, responsible and moral manner in Erie.

Banker DiCarlo declined to comment. JPMorgan spokesman Brian Marchiony says the deal gave the school district immediate debt savings and protected it against unpredictable interest rate risk in the future. He declined to answer specific questions.

Overpaying Fees

The Pennsylvania transactions involve interest-rate swaps, which are derivatives. Derivatives are financial contracts whose value is based on other securities or indexes; interest-rate swaps are tied to future changes in lending rates.

The Pennsylvania deals show that school districts routinely lose when making derivative deals. They pay fees to banks that are as much as five times higher than typical rates and overpay advisers by as much as 10-fold. That means banks often underpay schools on upfront amounts, as JPMorgan Chase did in Erie, public records show. And school officials aren't always well served by their supposedly independent advisers, whose fees are paid by the banks selling the deals -- only if the sale is made.

`Getting Fleeced'

In 15 Pennsylvania school districts, officials entered into interest-rate-swap deals worth $28 million since 2003, according to data compiled by Bloomberg. Of that dollar amount, the schools took in $15 million, and banks and advisers got the rest as fees, Bloomberg data show.

``The school districts are getting fleeced,'' Pennsylvania Governor Edward Rendell says. The governor, 64, a Democrat who has been in office since 2003, says the state might in the future advise schools and municipalities on derivatives contracts before they sign with banks. Christopher Cox, chairman of the U.S. Securities and Exchange Commission, says he's concerned that municipalities are taking on more risk than in the past when they raised money primarily from bond sales.

``It's a serious issue, not only in Pennsylvania but across the country,'' says Cox, 55, who has headed the SEC since 2005. ``That is what we have seen repeatedly. More often than not, the municipalities aren't configured to have financial sophisticates in charge of these offerings -- and the result is that the firms are the only ones who know what's going on.''

Just five years ago, municipal derivative deals weren't sanctioned in Pennsylvania, the sixth-most-populous U.S. state. Then, in September 2003, the state Legislature adopted a law allowing schools and towns to use interest-rate swaps to lower borrowing costs and raise cash.

Exchanging Payments

In a swap, two parties agree to exchange payments over a period of time that can last as long as 30 years. Typically, one agrees to pay a fixed rate and the other to pay a variable rate that changes with a benchmark index or formula defined in the contract.

Public agencies can benefit by using derivatives to guard against swings in borrowing costs or to lock in current interest rates for bond sales they might not make for years. In many cases, school districts use swaps as a way to refinance bonds they've issued in the past.

Derivative deals can bring banks fees three times higher than the traditional selling of municipal bonds, public records show. School districts don't know whether they're getting fair market values with swaps because the contracts are private; they don't know how to compare their deals with those done by other districts.

`Profits Are Greater'

This lack of transparency is a boon for the banks, says Christopher ``Kit'' Taylor, executive director from 1978 to 2007 of the Municipal Securities Rulemaking Board, a panel that issues rules on municipal bond sales.

``Business moves from transparent and competitive markets to markets where there is less transparency and the profits are greater,'' he says. ``If you don't know how much you're paying, you're going to be paying too much.''

The Pennsylvania swap law was passed after lobbying by financial advisory firms that stood to profit from such deals.

The legislation made the state a member of an expanding club. Forty states give government bodies explicit authority to make derivative deals, up from none 20 years ago, says David Taub, a lawyer who specializes in derivatives and is a partner at McDermott Will & Emery in New York.

Derivatives aren't regulated by the SEC, the MSRB or by states. Pennsylvania offers a clear look at these deals because, by law, all the contract records must be publicly filed with the state.

Pennsylvania Adviser

One derivative advisory firm that backed the Pennsylvania swaps legislation is Investment Management Advisory Group Inc., or IMAGE. The Pottstown, Pennsylvania-based company was raided by the Federal Bureau of Investigation in November 2006 in connection with a criminal antitrust investigation of bid rigging of investment contracts that are sold to states and municipalities.

The U.S. Justice Department is also probing municipal derivative deals. IMAGE has said it's cooperating with the probe. No charges have been filed.

In some Pennsylvania transactions, banks bought from school districts rights to exercise options on an interest-rate swap, or swaptions. Banks can choose to exercise the option if they stand to make money or can let the option expire if interest rates aren't favorable to them.

Banks Hedge Risk

The banks that arrange these deals create the swap contracts before pitching them to schools. Using software programs designed for valuing swaps, they calculate prices for which they can sell them after a school signs a contract. That's how the banks make money. For example, if a bank agrees to pay a district $800,000 in a deal it valued at $2 million, it could reap $1.2 million for itself and middlemen.

``They load it off instantly,'' says Taylor, who's now on the advisory board of Rockwater Municipal Advisors LLC, an Irvine, California-based investment firm.

Banks hedge their risk in derivative deals by making trades to cover possible losses to school districts. The banks make their money from fees, regardless of interest rate movements.

The reason Erie and other districts don't know how much the bank makes from a deal is because banks don't tell them, the records show. The money isn't paid immediately out of school budgets. Fees are hidden from schools because banks include those costs in the contract by adjusting interest rates up or down.

SEC Disclosure Rules

While the SEC doesn't regulate derivatives, it has authority to oversee how banks conduct transactions. SEC Chairman Cox says all financial firms should tell clients what their fees are before signing any deals.

``Brokers and advisers should disclose their compensation and conflicts of interest to their customers, and to the extent that they are regulated by the SEC, they must,'' he says.

Cox also says school district officials have a responsibility to the public and to bond investors to ensure their advisers are actually independent and acting in the best interests of taxpayers. ``To the extent that municipalities are participating in transactions they are not qualified for, there is an obligation to get good independent advice,'' he says.

More than two dozen Pennsylvania school districts bought swaps that bet on the spread between two interest rates. Many bet wrong. Since 2006, at least 27 school districts gambled that the spread would widen between either the five- or 10-year London interbank offered rate on the one hand and weekly municipal bond yields or the one-month Libor on the other.

The opposite happened: Spreads narrowed as long-term interest rates fell. The schools had to pay banks, or they could pay a steep exit fee, as Erie did with its swaption to cancel the deal.

Historical Fluke

School district officials say their advisers have told them the contracting of the spreads was a historical fluke. In the Exeter Township School District, 55 miles (88.5 kilometers) northwest of Philadelphia, Financial S&lutions LLC told the schools their swap deals shouldn't have lost them money.

``They tell me that's never happened before,'' says Ernest Werstler, who was business manager of the district until November, when he retired. ``It's happening to us now.'' Financial S&lutions didn't respond to requests for comment. Deane Yang, head of research at financial advisory firm Andrew Kalotay Associates Inc. in New York, says local officials are putting too much stock in financial advisers who are paid by banks--and in many cases are referred to schools by banks.

``It's like trying to decide whether a used-car dealer is offering you a good price or not,'' says Yang, who doesn't work with school districts. ``There's a car appraiser down the street who tells you he will provide an independent evaluation. But he's paid only if there's a sale.''

`Pound Someone's Brains'

School board members usually have a poor understanding of derivatives, says Peter Egan, a financial adviser and former public finance banker at a unit of Cherry Hill, New Jersey-based Commerce Bancorp Inc.

``A derivative is a very powerful tool,'' says Egan, who's now managing director of Bordentown, New Jersey-based Phoenix Advisors LLC, which advises local governments on bond sales. ``It's like a hammer. You could use it to hammer in a nail with perfect precision. But you could also use it to pound someone's brains out.''

In many cases, the banks repeatedly sell more derivatives to replace old ones. In Bethlehem, Pennsylvania, JPMorgan and Morgan Stanley sold the school district eight swaps on just two bond issues, records show.

Outside Advice

``It sure looks a lot like churning,'' Yang says. Churning is a term used to describe how stockbrokers or insurance agents sometimes continually sell and resell the same or similar products to clients in order to make more in fees. ``Doing more than one swap against a single bond issuance definitely benefited the swap adviser and bank, but probably not the school district.''

In Pennsylvania, it's the financial advisers who are supposed to keep school district officials from getting fooled. That's why the 2003 law allowing for swaps requires districts to use independent advisers.

``There was a fear that these deals were being pushed on the unsuspecting, perhaps, without them getting any other advice,'' says Steve Nickol, a Republican member of the Pennsylvania House of Representatives who introduced the legislation.

Lobbyist Leads Change

Financial advisers -- especially IMAGE, which opened in 1992 -- backed the swaps bill from the beginning. At an Oct. 16, 2002, hearing in Harrisburg, the state capital, Rick Frimmer, a public finance attorney, and Martin Stallone, managing director of IMAGE, said swaps would save taxpayers money. Since 1998, IMAGE's founder, David Eckhart, has personally contributed $469,400 to Pennsylvania elected officials, political action committees and candidates for office, campaign records show.

IMAGE said in a written response to questions that the firm never lobbied for the law. It said Eckhart's contributions had no bearing on the 2003 legislation.

Nickol says he was first approached about approving swaps for school districts and municipalities in 2002 by Elmer Heinel, a public finance lobbyist whose clients have included bond underwriters Meridian Capital Markets Inc., Stallone's former employer, and Wheat First Securities Inc.

Authority to Buy

Heinel has contributed $141,245 since 2000 to state lawmakers, political action committees and candidates running for office. Heinel says the donations weren't tied to the legislation.

The law gave cities, counties and school districts the explicit authority to buy swaps.

Municipal derivatives had been gaining ground in other states, as well as in large cities such as Philadelphia and at agencies like the Pennsylvania Turnpike Commission, as a means to lower borrowing costs, Stallone told the legislature at the time. The law passed 197-0 in the House and 45-0 in the Senate.

``There could be huge cost savings for many of the local governments,'' Nickol said. Rendell signed the bill in September 2003. That same month, the Erie school district signed the swaption deal with JPMorgan.

Erie Buys In

Once an iron and steel center, Erie is now left with shuttered factories and an aging population. While General Electric Co.'s $4 billion transportation unit, which mainly builds locomotives, maintains its headquarters in Erie, much of the city's manufacturing base has disappeared.

Since 1970, the city's population has declined 30 percent. Seventy-six percent of students in the district are eligible for free or reduced-price lunches, according to the state Department of Education.

JPMorgan and IMAGE had pitched the swaption to the school board in June 2003. JPMorgan's DiCarlo and IMAGE's Mike Garner said at that meeting the district had locked in high interest rates in 2001, when it issued $38.7 million in bonds, according to an audiotape of the June 17, 2003, meeting.

In the two years after that, interest rates had declined. Using traditional bond financing, the district couldn't take advantage of the lower rates because tax law prohibited refinancing before 2011, Garner said.

Money Now

By agreeing to a swaption with JPMorgan, the district could cash in immediately, Garner told the board. The bank would make an upfront payment to Erie. In return, the school allowed the bank to enter a swap with Erie in the future, from 2011 to 2029.

The value of the swap hinged on four factors: the length of time before the option was exercised, credit market expectations of future interest rates, the relationship between a fixed rate to be paid by Erie and changing interest rates and volatility of lending rates.

The bank could choose to exercise or decline the option. The school district had no say in that decision.

JPMorgan had recommended IMAGE to the school district's law firm, Knox McLaughlin Gornall & Sennett PC, says Tim Sennett, a partner in the firm who worked with the school district on the derivatives deal. IMAGE's Garner told school board members he thought the district should make the deal.

'Risks Are Reasonable'

``Given your situation, the economics are very good for the district,'' Garner said, according to the tape of the meeting. ``The risks are reasonable. I believe everyone on the board has a good grasp of what the risks are.''

The board didn't make a decision that day. ``This was a new concept we'd never heard of,'' says Richard D'Andrea, the district's business administrator. ``Given the tight budget situations that we're always under, that's a very strong motivation to help balance the year's budget.''

On Sept. 4, 2003, as a new school year was starting, the board met again with DiCarlo, who said the district should sign the deal and the bank would give it $750,000. Board members asked DiCarlo how much the bank would make in fees.

DiCarlo said, ``Everybody has asked, and it's a reasonable question: What does JPMorgan, what do we get on this transaction? I can't quantify that to you,'' according to a transcript of the meeting.

$2 Million Asset

DiCarlo, who was a state representative from Erie from 1973 to 1980, didn't tell the board that the contract was worth $2 million in global derivative markets. Based on interest rates that day and terms of the deal, Bloomberg data show that was the value of the contract.

JPMorgan's gross markup on the swaption was 0.82 percentage point of the rate compared with a 0.16 percentage point charge Goldman Sachs Group Inc. collected from the Philadelphia School District on a comparable swaption the city had bid competitively in March 2004.

In a written response to questions, IMAGE disputed the amount of fees paid to JPMorgan. ``The numbers your analysis produces for the districts are clearly way off the mark,'' it wrote.

IMAGE said it didn't know the bank's fees, estimating they were $365,000-$495,000. IMAGE said it doesn't know who recommended the firm to Erie as an adviser. ``Regardless, there are no conflicts,'' IMAGE wrote. IMAGE said its fees were normal for the industry.

Two-Page Opinion

D'Andrea says he relied on assurances from IMAGE that the deal was right for the district. IMAGE wrote a two-page opinion saying the deal was fair. It didn't say how much the fees were, according to a copy obtained under a public records request.

``The net swaption premium to the district was adjusted to reflect the forward starting and option-adjusted nature of the swaption, a reasonable hedging spread in the Libor markets and a fee to JPMCB reflective of its time and effort dedicated to the district as well as the inherent credit, operational and market underwriting hedging risk of the transaction,'' it said. Board member Eva Tucker, a retired professor of geoscience at Penn State University's Erie campus, says the board didn't fully understand the deal and trusted IMAGE, which recommended the transaction.

``We're not financial experts,'' Tucker, 72, says. ``We relied on the best advice we thought we could get.''

James Herdzik, a school board member who works as a sales manager at a machine shop, says the district couldn't turn down the deal because it was desperate for money.

``We're scrambling for every penny we can get,'' Herdzik, 48, says. The board approved the deal in a 6-0 vote.

Paying to Cancel

JPMorgan actually gave Erie $785,000 -- $35,000 more than DiCarlo had promised. The bank paid IMAGE $60,000, gave bond insurer Financial Security Assurance Inc., known as FSA, $57,585, paid lawyers and other middlemen $106,000 and kept $1 million as its revenue, according to public records and Bloomberg data.

By June 2006, the swaption had left Erie's district with a $2.9 million liability because expectations of future short-term interest rates had risen, narrowing the difference between future costs to borrow for one year and for 30 years. In July 2006, the district paid JPMorgan $2.9 million to terminate the swaption.

The district got the cash from the proceeds of two new derivative deals it did with Pittsburgh-based PNC Financial Services Group Inc.'s PNC Capital Markets unit. The transactions paid Erie schools $732,000 up front. One deal was an interest- rate swap that so far has lost $32,000 for the district, according to local records.

Most In Need

Erie revised the terms of the swap in October 2006, betting that beginning in March 2008, long-term rates would rise faster than short-term rates. The other deal is a swaption; PNC hasn't exercised the option yet.

Herdzik says he can't see why banks would take advantage of struggling school districts.

``It's kind of like preying on the municipalities that are most in need of money,'' he says. ``It's like we got raped.''

Other Pennsylvania school districts are paying banks excessive fees. Bethlehem, 50 miles north of Philadelphia, is also a former steel-making center. With a population of 72,000, the city has maintained its historic buildings.

The Central Moravian Church is a symbol of the group that founded the city on Christmas Eve in 1741. In the industrial area of the city, Las Vegas Sands Corp. is converting an old steel mill into a casino.

Money-Making Plan

Bethlehem's school district has used derivatives to try to make money. At an April 2005 meeting, Les Bear, of advisory firm Arthurs Lestrange & Co. in Pittsburgh, told the school board by arranging two interest-rate swaps tied to $110 million in bond issues, the 15,350-student district could generate more than $11 million over 25 years.

School finance director Stan Majewski supported the plan.

``Mr. Majewski commented that we all try to surround ourselves with people who know more than we do,'' minutes of the meeting say. ``He believes Arthurs Lestrange is the best public financing department of any organization in this country.''

None of the board members asked Bear or Majewski how much the district would pay for the swaps, the minutes show.

A month later, Lestrange, working with a Lancaster, Pennsylvania, firm called Access Financial Markets, negotiated two swaps with JPMorgan and Morgan Stanley without competitive bidding.

$3 Million Fees

So far, the district has taken in about $900,000 from the deals, Bloomberg data show. That compares with $3 million in transaction fees. Lestrange and Access made $630,000 each for arranging the swaps, according to school district records. New York-based Morgan Stanley made $840,000 and JPMorgan received fees totaling $900,000, Bloomberg data show.

Lestrange and Access earned a fee 10 times more than the Easton Area School District, Bethlehem's neighbor, paid its adviser on a comparable interest-rate swap in 2004. In a memo to school board members, Majewski said the fees included annual interest rate monitoring that would cost the district hundreds of thousands of dollars.

Bear of Lestrange and Matthew Kirk of Access didn't respond to requests for comment.

The rates the banks charged Bethlehem were twice the average for comparable swaps deals. In this kind of swap, in which both sides pay floating interest rates, a bank calculates its fees by subtracting an amount from the rate it will pay.

In the average deal of this type, banks lower the rate by 0.06 percent, says Jeff Pearsall, a managing director of Philadelphia-based Public Financial Management, the largest municipal adviser in the U.S.

JPMorgan subtracted 0.13 percent in the Bethlehem deal, and Morgan Stanley lowered its rate by 0.11 percent. Morgan Stanley spokeswoman Jennifer Sala declined to comment.

`What's Going On?'

``It's obscene,'' says Peter Shapiro, managing director of South Orange, New Jersey-based adviser Swap Financial Group, who doesn't advise Pennsylvania school districts. ``What is going on in Pennsylvania?''

Bethlehem has paid Lestrange $1.6 million and Access $1.3 million for their work on eight of the district's 12 swaps, public records and Bloomberg data show. JPMorgan and Morgan Stanley made a total of $5 million on those transactions.

Board member Joseph Craig, who approved the deals, says he's not qualified to discuss the deals and doesn't know how much they cost.

``I really don't remember a whole lot of specifics about it,'' says Craig, 64, a retired special education teacher who's been on the board for 10 years.

School district business manager Majewski declined to answer questions about swaps and fees.

``They've worked very successfully for me,'' he says. ``Everything I've done is done publicly with my local taxpayers.''

Never Told Fees

The school district didn't know that it had overpaid the banks by about $870,000 because the banks and Lestrange never told them what the fees were, according to minutes of school board meetings.

Sometimes school districts have agreed to swaptions even when a local financial official warns against no-bid deals. In Butler County, a rural area dotted with working farms 40 miles north of Pittsburgh, County Controller Jack McMillin says the lack of competitive bidding for public finance has cost taxpayers.

``It's a form of institutionalized larceny under the guise of getting taxpayers a good deal,'' McMillin says. He wasn't involved in the school board decisions.

The board relied on an old friend, with the kind of connections that go far in western Pennsylvania: football and politics. The district put its trust in municipal finance firm Russell Rea Zappala & Gomulka Holdings Inc., known as RRZ.

Hall of Fame

Greg Zappala, head of JPMorgan's office in Cranberry Township just north of Pittsburgh, is the son of former Pennsylvania Supreme Court Chief Justice Stephen Zappala and the brother of Allegheny County District Attorney Stephen Zappala Jr. Greg Zappala, 46, played football for the University of Miami Hurricanes in the early 1980s.

He was a roommate of Jim Kelly, a Pittsburgh-born, Hall of Fame quarterback who led the Buffalo Bills to four Super Bowls. Zappala's uncle, Charles Zappala, was an RRZ executive.

In 1990, Greg Zappala became a broker with the firm. One of the founders was Andy Russell, formerly of the Pittsburgh Steelers.

In 2003, JPMorgan bought the firm's municipal unit: RRZ Public Markets Inc., which Zappala ran. The company had worked for the Butler Area School District since 1991. There was no competition when the former RRZ bankers paid $730,000 for an option to refinance, five years in the future, $39 million of bonds sold by the school district in 1998.

`No Secrets'

Russ Greer, 61, who served on the Butler school board at the time of the deal, says it provided much-needed cash and was approved at an open meeting.

``There were no secrets,'' he says.

Except one. Since the school district didn't know what JPMorgan made on the transaction, it didn't realize it had become another Pennsylvania municipality that was underpaid up front on a swaption deal.

``The school district has no knowledge of the specific fees made by JPMorgan,'' Superintendent Edward Fink said in a written response to questions.

The contract had a market value more than three times what the district was paid, Bloomberg data show. JPMorgan decided how much of the $2.2 million it would give the district, without ever telling the school board.

The bank paid $165,813 to bond insurer FSA, $40,000 to IMAGE, $147,500 to five law firms and $23,000 to the Butler County General Authority. JPMorgan kept the remaining $1.1 million as its own revenue.

The Board's Understanding

Controller McMillin, a Republican, says he doubts whether the elected school board had the skills needed to know whether it was getting enough for the option.

``I can't imagine how they could have understood that,'' he says.

Penelope Kingman, a former member of the school board, voted against the derivatives deal in 2003. She felt her colleagues had failed to grasp the risk they were taking in exchange for the money offered by JPMorgan.

``The financial guys would come in with a lot of stuff that nobody at the district understood,'' she says. ``Local governments are entering into these without fully understanding what they are doing.''

JPMorgan spokesman Marchiony says, ``the swaps used by Erie and Butler, which were vetted by independent financial advisers and voted on in publicly attended meetings, enabled both districts to realize immediate debt service savings, while protecting them against unpredictable interest rate risk over several years.''

`Beyond Angry'

Swap deals in Pennsylvania work out well for banks, advisers and lawyers who are paid for putting them together. Schools, parents and students see it differently.

In Erie, Rosena Wright says she's growing angry as her son, Desmond, 13, has been transferred from Roosevelt Middle School, which the city shut down in 2007 after the heating failed, the roof leaked and a ceiling tile fell on a student's head. Desmond is now in a temporary space the school district is leasing from a church. Wright, 44, a day-care worker, says no one told her about the deal that cost her schools $2 million.

``I'm beyond angry,'' she says. ``I really want to tar and feather somebody.''

Erie schools superintendent Barker says he had thought the 2003 derivatives deal would save some money for the district.

``We're always at the mercy of the experts that advise us,'' he says, adding that schools have to find a better way to raise money. One option would be to return to old-fashioned, publicly bid bond sales. He says he doesn't begrudge the banks or advisers their right to get paid.

``We expect people to make a profit,'' Barker says. ``But they don't have to put their interests over the kids'.''

To contact the reporters on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net ; William Selway in San Francisco at wselway@bloomberg.net

GA #2 in bankruptcies

By CARRIE TEEGARDIN
The Atlanta Journal-Constitution
Published on: 01/29/08

Thousands of Georgians facing economic woes have given the state a dubious ranking: the second-highest personal bankruptcy rate in the nation.

[ Submit your comments below. ]

In 2007, bankruptcy courts statewide processed one personal bankruptcy filing for every 65 households, according to statistics compiled by the National Bankruptcy Research Center. Only in Tennessee was personal bankruptcy more common, with one filing for every 59 households.

"The economy is just so bad that that is spurring bankruptcies," said Rich Thomson, a partner at Clark & Washington, Atlanta's largest bankruptcy firm. "We have record numbers of foreclosures every month."

Bankruptcy filings across the nation were up significantly in 2007, and Georgia was no exception. Bankruptcy courts statewide processed 48,227 personal bankruptcy filings last year, an increase of 24 percent over the 2006 total, according to the research center.

In a comparison of the total volume of filings, irrespective of the rates, Georgia also stood out. Only California and Ohio had more 2007 filings than Georgia did.

Georgia has routinely landed near the top of the bankruptcy rankings in recent years. Experts cite a variety of forces, ranging from a slate of creditor-friendly laws, to the state's entrepreneurial spirit to a booming real estate market.

"Many of the things that make Georgia a wonderful place to live also make it potentially vulnerable to spikes in bankruptcy filings," said Jack Williams, a professor at Georgia State University's law school.

The penchant of Georgians to start their own businesses enriches only a minority of the folks who set out to be their own boss.

"Most new businesses fail, that's simply the nature of the beast," said Williams, currently the resident scholar at the American Bankruptcy Institute.

When small businesses go under, that often results in a personal bankruptcy filing as well.

Georgia also stands out for a healthy real estate market that was buoyed in part by reliance on subprime mortgages, Williams said. Those mortgages have much higher failure rates than lower-interest prime mortgages.

The state's attractiveness to young retirees may also be playing a role, Williams said. These are people who are at risk for health problems and vulnerable to bankruptcy if they have no health insurance coverage.

"The folks in the 55 age group and above are the fastest-growing segment of bankruptcy filers," Williams said. "Georgia has a lot of folks who fit in that age group."

Thomson, the bankruptcy attorney, said Georgia's foreclosure laws also push up the number of bankruptcies. Georgia allows one of the fastest foreclosure processes in the nation. The process is fast here, in part, because Georgia allows "non-judicial" foreclosures, meaning that foreclosures can proceed without the approval of a judge.

"Georgia is definitely a creditor-rights state and the non-judicial foreclosure process certainly spurs a lot of bankruptcies," said Thomson, the bankruptcy attorney.

Filing for bankruptcy protection automatically halts a foreclosure sale and gives the homeowner more time to cover overdue mortgage payments.

"Many, many people are able to keep the house" as a result of filing for bankruptcy, Thomson said.

Most people facing a foreclosure file for Chapter 13, which allows consumers to hold onto their house and car, but requires that they repay a portion of their debts. Chapter 13 filings are more common in Georgia than Chapter 7, a liquidation in which most debts are wiped out, but so are all of a consumer's assets that aren't protected by exemptions.

Congress attempted to cut down on the number of bankruptcy filings with reforms that took effect in October 2005. Bankruptcy filings skyrocketed right before the law was enacted, then fell dramatically right after the law was implemented.

But the numbers have been steadily rising since. Overall consumer filings across the country hit 801,840 last year, up 40 percent from the 2006 totals, according to the research center. Experts expect economic problems to fuel another big year in 2008.

Although bankruptcy has become commonplace in states like Georgia, it's still a difficult step for many consumers, Williams said.

"Go down to the court and watch people file these petitions and go through their examinations and talk to them," he said. "You will realize that there is still a tremendous stigma and I'm not just talking about the 10 years it floats on your credit history report. I'm talking about people who really feel horrible about the fact that they are in the situation."

For many, Williams said, bankruptcy could have been avoided if American consumers had a better grasp on the basics of budgeting and debt — and especially preparing for difficult times.

"Many of us are vulnerable," he said. "We're one job layoff or reduction in work hours or disease or illness or accident away from bankruptcy, because we haven't saved for the rainy day."