Thursday, November 15, 2012

You can guess what grade Peter Taylor gave the Berkeley students for their swap report

From the San Francisco Chronicle op ed by Peter Taylor, UC chief financial officer:

The University of California has come under criticism for its finance decisions - specifically three interest rate "swaps" made on funds borrowed over the past 10 years to expand university medical centers. Swaps exist to insulate borrowers such as UC from volatile interest rates. They work like this: The university borrowed money at a variable interest rate, with the payments rising and falling with interest rates. It then swapped those payments for payments at a fixed rate. Thus, if the interest rate rises, then the university pays less than it would have if it had stayed with the original loan. But if the interest rate drops, as it has, then the university pays more.  Like any public institution, UC must not have too much exposure to rising interest rates or it risks coming up short for expenses. We are not in the business of gambling with funds entrusted to us by taxpayers, students and parents, and patients in our hospitals. But these critics unwittingly advocate that UC do just that...

As much as I love Shakespeare, I don't pretend to be qualified to teach a class on his works. Similarly, the students who have criticized the university's policies should understand that just because they are in graduate school doesn't mean they are experts in everything. Their miscalculations are outrageous. Indeed, if this level of "research" were produced for a class on finance, it would merit an "F."

Full op ed at:

The full op ed is similar to the analysis provided in earlier posts on this blog.  The issue came up also in the Regents meeting yesterday morning (also posted on this blog).  The one point in the Berkeley student swap report not dealt with in the Taylor op ed is the question of litigation.  In the report, it was noted that some entities that engaged in swap transactions are suing over losses.  It may be that UC doesn't think it could win such a case since it has financial experts such as Taylor on staff and it might be hard to prove that UC was somehow hoodwinked.  Litigation costs money so filing a suit likely to lose would not be wise.  However,  no one has given that explanation.


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