A suspect bond deal is finally put to rest
Getting out of some shaky deals in state highway bonds took more than a decade, the right alignment of the stars in the bond market and some changes that no one understood when the new tax code was passed by the Republican Congress.
But New Mexico is finally free of a back-room highway bond deal that kept then-Gov. Bill Richardson out of then-President-elect Barack Obama’s Cabinet once it was exposed.
Back in 2004 and 2006, very few people understood what had been done to get $1.6billion in state highway bonds used to start a bunch of highway projects and the Rail Runner commuter train.
And even fewer knew why a company known as
CDR Financial Products Inc. of Beverly Hills, Calif., was involved.
The Richardson administration wanted the $1.6 billion in bonds to make a big splash on the state’s economy, so the bonds were issued over two years — 2004 and 2006 — instead of three. But the state Department of Transportation didn’t have the money flow to guarantee that amount at the fixed rates of interest it could offer at that time.
To make the project work, $420 million of the 2004 bonds were issued as variable rate interest bonds — meaning the interest rate paid by the state would be determined by various market indexes like the London InterBank Offering Rate (LIBOR), which was later accused of bid rigging. Barclays Bank agreed to pay $350 million in fines to settle charges it rigged LIBOR rates.
To keep the state from getting gouged by a sudden increase in bond interest rates — much like a homeowner with a variable rate mortgage can get hit — the state decided to use interest rate swaps to stabilize the rate.
An interest rate swap is a forward contract in which one stream of future interest payments is exchanged for another based on the amount of the bonds. Interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would have been possible without the swap.
The swaps were designed to give the state a fixed rate on the bonds as long as financial markets held steady.
The state entered into swap agreements with six banks, one of which, Lehman Brothers, later went bankrupt during the financial crisis that began in 2007, causing the state to have to scramble to post $16 million in collateral until it found another bank to take over the deal.
The swaps were arranged by CDR Financial Products.
One of the company officers later testified in a criminal trial that the company made almost $1 million for 13 hours of work on the New Mexico deal.
Needless to say, since 2009 state legislators and state officials have been eager to get out of the interest rate swaps.
But the costs of terminating the bonds was just too high, until recent increases in interest rates and changes in the tax code pushed by President Donald Trump that would cost the state $1 million a year in payments to banks holding the swap agreements. That new cost made it fiscally responsible to refinance the entire mess.
State officials were also motivated by balloon payments in the final two years of the bonds.
By refinancing the bonds for an additional few years, the New Mexico Finance Authority got rid of the balloon payments as well as the swap arrangements.
Enter CDR
The people who inherited oversight of the bonds at the New Mexico Finance Authority back in 2009 couldn’t explain why CDR was involved in the issuance of the variable interest rate bonds when other companies that had bid on handling the bonds were quite capable of doing the work.
CDR had been paid more than $950,000 for its role in the swap arrangement out of the bond proceeds, but there was never a contract outlining what the firm was supposed to do for the money.
The request for proposals issued in 2004 never asked companies whether they were experienced in swap deals. But it was later added as an item on bid scoring sheets boosting CDR’s score from fourth to second.
The item on swaps on the bid scoring sheets appeared to have been added after they were originally drawn up, because the size of the type for that item on the bid scoring sheets was larger than the rest of the items scored.
The company was later given a no-bid contract to handle the bond escrow accounts.
Company executives were later indicted in a federal court in New York for rigging bond bids across the country.
In 2012, during a separate federal criminal trial in New York City, Douglas Goldberg testified that he delivered a $25,000 check directly to then-Gov. Richardson in 2004 for one of his political action committees.
According to Goldberg, CDR officials had contributed a total of $100,000 to Richardson political action committees in 2004 in order to get the work with the New Mexico Finance Authority, which handled bond transactions for the Department of Transportation.
Richardson’s attorney discounted the testimony as “not credible.”
By 2008, CDR was under investigation by the U.S. Department of Justice’s Antitrust Division for hundreds of bond deals around the country.
But, in New Mexico, the FBI was investigating CDR’s bond deals here, the contributions to the Richardson political action committees and his advisers who had been wined and dined by CDR executives in Los Angeles.
Richardson, who was expected to be Obama’s secretary of Commerce, withdrew his name from consideration when the federal investigation was brought to light.
A federal grand jury ended without issuing any indictments, but the
U.S. attorney for New Mexico at that time, Greg Fourrat, said in a letter to attorneys for Richardson and others that the lack of indictments should not be seen as exoneration.
Fouratt said the investigation revealed that CDR and its officers made substantial contributions to Richardson’s political organizations while the company was seeking the work and that “pressure from the Governor’s Office resulted in corruption of the procurement process so that CDR would be awarded such work.”
As for now, state officials after a lot of hard work are glad to be out of the swap deals.