Afternoons with Jim Mora: The Panel today [DCC interest rate swaps]

### radionz.co.nz Monday 5 November 2012
Afternoons with Jim Mora
http://www.radionz.co.nz/national/programmes/afternoons

The flirtations of our local bodies with money mechanisms on money markets that may be getting ratepayers into schtuck.

16:35 The Panel with Garry Moore and Finlay MacDonald (Part 2)
Topics – Every schoolboy used to know that, at the height of the empire, almost a quarter of the atlas was coloured pink, showing the extent of British rule. An Otago University academic says Dunedin ratepayers should be very concerned about losses on interest and currency swap schemes that appear in the council’s annual report. Millionaire Kim Dotcom would be putting his money where other investors wouldn’t if he goes ahead with plans to relaunch Pacific Fibre, according to Prime Minister John Key. (24′42″)
Audio | Download: Ogg Vorbis MP3 | Embed

16:50 Jim Mora, Dr Robert Hamlin and guests discuss Auckland City Council and Dunedin City Council activities with respect to interest rate swaps (IRS). Together, the councils may have squandered up to $200 million of ratepayer funds. Is a royal commission of inquiry required? In Dunedin City Treasury’s case, interest swap rates and financial derivatives may be being used to ‘assist’ stadium financing, and much more. In the city council annual report the IRS activity goes unexplained, being recorded as (multi-million dollar) losses (see page 146).

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The (NZ) Banking Ombudsman suggests some customers & their advisers don’t understand the product. [IRS and Derivatives]

http://en.wikipedia.org/wiki/Interest_rate_swap

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### stuff.co.nz Last updated 05:00 04/11/2012
Business
Banks ‘plundering society’ globally
By Rob Stock
Claims banks missold interest-rate swaps to businesses and local authorities have been making headlines around the world. Interest rate swaps are a derivative financial tool used by sophisticated businesses with skilled treasury functions to limit interest rate risk. But it is becoming clear that in places such as Britain, Italy and America, interest-rate swaps were sold by banks to organisations that did not understand the risks they were taking. In case after case, interest rate swaps often sold in 2007 and 2008 as “protection” against interest rates rising sharply have served mainly to protect bank profits by locking businesses and local bodies into high levels of interest ahead of those rates falling.
Read more

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This article is from the May/June 2012 issue of Dollars & Sense magazine.

The Swap Crisis
We have your city. Pay up, or else!
Interest rate swap deals have allowed the big banks to hold local governments and agencies hostage for tens of millions of dollars.
By Darwin BondGraham
In 2002 a little-known but powerful state agency in California and Wall Street titans Morgan Stanley, Citigroup, and Ambac consummated one of the biggest deals to date involving a type of financial derivative called an “interest rate swap.” A year later the executive director of the Bay Area’s Metropolitan Transportation Commission, Steve Heminger, proudly described these historic deals to a visiting contingent of Atlanta policymakers as a model to be emulated. Swaps were opening up a brave new world in public finance by extending the MTC’s purchasing power by $200 million, making a previously impossible bridge construction schedule achievable in a shorter timeframe. The deal would also protect the MTC from future volatile swings in variable interest rates. To top it off, the banks would make a neat little profit too. Everybody was winning.
Then in 2008 it all came crashing down. The financial system’s near collapse, the federal government’s unprecedented bailouts, and global economic stagnation mean that the derivative products once touted as prudent hedges against uncertainty have instead become toxic assets, draining billions from the public sector.
Read more

Posted by Elizabeth Kerr

127 Comments

Filed under Business, DCC, DCHL, DVL, DVML, Economics, Media, Name, People, Politics, Project management, Property, Site, Sport, Stadiums

127 responses to “Afternoons with Jim Mora: The Panel today [DCC interest rate swaps]

  1. Rob Hamlin

    INITIAL MESSAGE TO RNZ

    Hi,

    As you may be aware the DCC is in financial difficulties. Some of these are Stadium related, but there may be much more serious issues lying under the surface. The DCC has a large corporate group (DCHL) which has caused its fair share of problems in the last few years. One of the more unusual aspects of this group is that the treasury function of the DCC is contained within this group of companies. Dunedin City Treasury Ltd acts as a banker for both the other companies, and I believe for the DCC itself. Which does place the CEO of the latter in a rather unusual position.

    It is reported in today’s ODT that most Councillors have little awareness of what lies within the DCC’s annual report that they approved on Monday (.pdf attached). That’s a pity, because in this voluminous and incoherent document there is one critical table of figures – there may of course be others, but this one seems to be quite enough to be going on with!

    This table of figures appears on page 146 of the report. It is described as ‘Cash Flow Hedge Reserves’ – interestingly so – as all the figures that appear in these ‘reserves’ are negative numbers!

    The key row is described as: ‘Losses on interest rate swaps and foreign exchange’. For DCC & DCHL this loss was $17,211,000 in 2012 and $7,832,000 in 2011.

    This reveals that the DCC has lost c. $25 million in the last two years in swap related derivatives trading – to add to the $9 million loss incurred at some point previously (quite recently I would think).

    This scale of loss indicates an exposure far in excess of the amount required to hedge existing debt. Interest rate swaps can be used to both hedge and to speculate (see Wikipedia entry for details of this. While you are there, read about what happened to Fulham & Hammersmith Council when they went a’ dabbling in this market).

    I have suspected for some time, given the secrecy surrounding DCTL’s activities, that some significant meddling in this highly dangerous derivatives market was probably going on. Here it appears is the proof of that.

    • Elizabeth

      Rob, due to your ‘RNZ message’ here and on radio today there is major cause for the mayor and (by inheritance of the position) the council chief executive to make public statements I rather think, hopefully before they’re whisked away, along with cohorts, for extensive interview by the powers that be.
      Unfortunately, chirpbird at ODT Online flew past the point of return, through their inference that not all city councillors are, let’s say it rather than cheep it, “to blame” – when I said there has been a gross dereliction of duty by each councillor. These people cannot FAIL to read and understand – and question – the financial reports they receive prior to tabling for council approval. No councillor has a right to be in governance, serving the renters and ratepayers of the city, if they are found to be inept, inadequate, contemptible, corrupt, conflicted, or indeed any combination of these.
      Believe me, of all the current contributors on the City’s finances at What if?, there are very few of us who have not intimately studied the Dunedin councils (past and present) via formal meetings, sub-committees, working parties, consultation processes, leadership groups, draft and strategic plans, district plans, plan changes, resource consents, long term and annual plans, one-on-one sessions, etc etc if not through employment and consultancy roles, and the impressive flow of information requests. Keeping tabs is very much a full time job. The results of this effort will become plain in the not too distant future.
      Each councillor is responsible for bad stewardship of the people’s treasure.
      If they didn’t see, didn’t question, what was being fed to them they’re fully liable.

    • Elizabeth

      As Rob mentions above, here’s a detail of page 146 from the DCC Annual Report:
      (open the image in a new tab or window to see enlarged)

      Dunedin City Council
      Report – Council – 29/10/2012 (PDF, 1.1 MB)
      Approval and Adoption of Annual Report 2012

      Dunedin City Treasury Limited
      Report – Council – 29/10/2012 (PDF, 2.8 MB)
      Dunedin City Treasury Annual Report 2012

  2. Anonymous

    Interview starts at 14 minutes 20 seconds.

  3. Rob Hamlin

    To add to my comments above. Auckland has lost $176 million this year in interest rate swap transactions and reports in the UK indicate that bank mis-selling of these instruments has been widespread across Europe and the USA. The figures are startling. The banks in the UK have agreed (with a legislative gun to their heads) to enter into discussion with companies seriously affected by mis-selling. Already more than 40,000 companies are involved. Milan, as only one local authority, has recently secured a repayment of around one billion dollars from a bank for mis-selling.

    Mis-selling occurs because these swaps are a zero sum gamble between two parties – usually a bank and one of its customers. The bank ends up with a serious conflict of interest during the selling process. If one thinks about it for half a millisecond no bank is going to aggressively sell anything that it does not expect to make a hefty profit on and therefore would expect their client (victim) to lose equally heftily on the other side of the deal.

    This may well be why the non-bank customers experience of these instruments in this country is one of consistent hefty losses. In many cases sufficient to bankrupt some farmers who have been sufficiently unwise to trust their bankers. The situations is well summarized by one ex-farmer quoted in the Sunday Star-Times in August.

    “People have to get to understand that banks are not your friends. Bank managers are not your business partners. They are in the business of getting the biggest return possible for their shareholders. They are not your mates.”

    The same article had one farmer estimate that bank contract break poison pills on his interest rate swap contract was in excess of a million dollars – this may give some indication of the height of the prison walls that now surround the DCC.

    Perhaps the most worrying aspect of the DCC’s exposure is its description of its wounds as “Losses on interest rate swaps and foreign exchange”. This ‘foreign exchange’ may relate to export activities such as logs, but it is certainly possible that the DCC have been dabbling in a particularly dangerous form of swap derivative in which the two interest rate payment flows are denominated in two separate currencies. One is likely to be NZD, the other is likely to be denominated in another OECD currency (Let’s hope). In fact it’s not just possible – It’s actually quite likely.

    If this is indeed what has been done, then the outcomes are potentially cataclysmic as the NZD is a highly volatile currency. Thus if the NZD fell to 40 US cents and 27p for example, the cost to the DCC for its side of the deal might double. As this has to be realised on the balance sheet as a capital loss on the entire cash flows for the period of the commitment to the swap deal, this kind of plausible/likely development could well be enough to bankrupt the City. It may be enough to bankrupt the Government too, as observers have noted that it too has considerable exposure to swap commitments – Maybe this is why Jonky goes pale whenever dollar devaluation is mentioned?

    It could bankrupt you too if any of these nice little deals that they have cooked up behind the ramparts of DCHL are in any way guaranteed by a direct charge on the rates (This little device allows them to guarantee THEIR debt on YOUR assets!).

  4. Hype O'Thermia

    Just think, if the DCC had done its gambling on the pokies instead, there might have been enough money siphoned into the, um, back passage leading to Big Rugby to pay their fair share of the Fubar Stadium.
    That’s supposing, of course, that rugby were to show an atom of willingness to pay its own way instead of being long-term benefit-bludgers.

  5. Calvin Oaten

    “Beam me up Scotty, I think this planet is in trouble.” “Och Aye Captain, I see that little ‘Burg’ Dunedin is in very big trouble. We dinna want ta be there when she blows.”

  6. Peter

    I don’t pretend to be au fait with this area of expertise, but I get the gist. Basically it’s another DCC gambling venture, to go with the stadium. I presume Athol Stephens – Harland’s finance man – and John Knight in Dunedin Treasury – are behind this?
    If I was Paul Orders and Dave Cull I’d be looking into this and taking some firm action. I get the very uneasy feeling that we haven’t got steady hands on the financial wheel. Don’t you? We can’t afford another gamble, like the stadium, to turn bad on us. Or is it too late?

  7. Hype O'Thermia

    It’s too late for THOSE losses, it’s not too late to “encourage” those staff members with the gambling problem that caused this monstrous departure from prudent stewardship to take unpaid leave while they address their issues in a suitable program.
    Someone could, if it’s not asking too much, take a wee look-see at how this mismanagement was able to happen and put into place measures for checking and double-checking of money movements over $25,000.
    In the past councillors’ time was “wasted” from having to approve any expenditure over $XYZ (forget exactly how much but with e.g. roading contracts it was peanuts). However seeing how much time they can now waste on JWD and deciding that not only can it be somewhat open-ish but it needs a clump of $thousands, and seeing how much too much time they had available for approving stadium expenditure, it seems like a good idea to turn them back to doing something that would (A) reduce mad money “magic”, (B) be within the intellectual grasp of nearly all current councillors and (C) keep them too busy for mischief.

    • Elizabeth

      Hype O’Thermia, I was thinking hard labour – rock splitting, trenching and road crew work – to make up for all the UNINSURED Dunedin City Council below and above ground infrastructure assets. Imagine that, after some mighty court processing, and selling of personal and ‘en-trusted’ private assets; with accommodation as live exhibits at the Old Dunedin Prison with the one-bar heater in each isolation cell turned off all year, every year. Life sentence. (Tourism!)

  8. Hype O'Thermia

    Ooh yes, and tourists would pay to feed them stale crusts ($10 a snack bag) and poke them with sticks (stick hire, $15 with $25 deposit). Good thinking, Elizabeth. I take it you’re angling for a job with the DCC as Tourism-Town Facilitation Manager.

  9. This scale of loss [$17,211,00] indicates an exposure far in excess of the amount required to hedge existing debt.

    IFRS fair value accounting requires that if you fix your interest rate, then you have to account for the difference between what you are paying, and what you would be paying if you had stayed floating. Now it is true that if the DCC has left their debt at some variable/floating rate, they would have been paying a shitload less interest (hence the $17m ‘loss’). However, if interest rates had gone up, and they were exposed to a variable/floating rate, then they would be paying more of our actual money in interest (or have a ‘credit’ if they had fixed and interest rates had gone up).
    In hindsight, it seems bloody stupid to have fixed at a relatively high rate, but I know plenty of homeowners who were proud of fixing themselves at 7% for a long fixed period instead of 9% over a one year period, but were then pissed off when interest rates crashed, and they were still stuck paying 7% for the remainder of their 5-year contract (and/or felt like the banks should have let them welch out of it).

  10. Ro

    So are you, distractedscientist, saying that the $17m is what the DCC might have not paid in interest had they not fixed the mortgage interest-rate for the stadium? Are you saying that this section of the report does not necessarily imply that the DCC was gambling on the futures market? That it represents an opportunity lost rather than a money loss?

  11. Anonymous

    To be clear, this is not the difference between a floating rate and a fixed rate of interest.
    This is taking money from DCC-controlled enterprises and buying risky financial derivative products. Essentially gambling. And losing. Which is to be expected from the DCC, incompetence in all matters financial.
    That’s $33 million gone ($9 million property writedowns, $17 million plus $7 million). No wonder they can’t meet the dividend.
    All those involved should be sacked forthwith and an inquiry (another one) launched.

  12. Anonymous

    Incompetence will be involved, no doubt at all, but there will be one or two who saw an opportunity in the latest rort to line their own pockets – or to the benefit of someone else – by using their position in this manner. Think stadium land purchases and contracts. Think Delta Investments’ property speculation and failures. Much of what happens at Dunedin City Council and its companies is related to Stakeholders scoring in the short term and waddling away, leaving everyone else to suffer in the long term. Just millions, right? Harmless, right? No collateral damage, right? It is criminal but they keep getting the message there is no consequences or accountability. Just a discussion or two. This corrupt council is run by psychopaths.

  13. So are you, Distracted scientist, saying that the $17m is what the DCC might have not paid in interest had they not fixed the mortgage interest-rate for the stadium? Are you saying that this section of the report does not necessarily imply that the DCC was gambling on the futures market? That it represents an opportunity lost rather than a money loss?
    That is certainly what I am saying (though the stadium debt is only a portion of council’s fixed rate borrowing). There is no money lost. Interest rates are incredibly low at the moment, so I’d imagine that most prudent councils are showing such losses. Given that Auckland’s per capita loss is approximately the same as Dunedin, that there is not a single accountant in Auckland or Dunedin who seems concerned about this?

    From the Office of the Auditor General:
    “2.111 Interest rate swaps are used by a number of local authorities to reduce exposure to interest rate variability on borrowings. These derivative financial instruments are required to be accounted for and recorded “on balance sheet” under NZ IFRS. Under current generally accepted accounting practice (GAAP), these items have not been recorded “on balance sheet”. Rather, information about the items has been disclosed in notes to the financial statements. The accounting treatment under NZ IFRS will therefore recognise these as either assets or liabilities (depending on the difference between the swapped interest rate and the underlying interest rate) for the first time.”

    In that light, it is worth contrasting DCC’s use of interest rate swaps with Hammersmith’s. DCC has fixed its rate, so as to protect against interest rate increases. Because interest rates went down, we’ve ended up paying more money that we might have. However, if interest rates had gone up, ratepayers would have had to pay more real money, if they had not fixed. This seems like a prudent and conservative approach.
    In contrast, Hammersmith was un-hedging. They were offering other people a fixed rate, while exposing themselves to the floating rate. If interest rates had gone down (which they were hoping) then they would have made lots of money. Interest rates went up, which left them having to pay lots of money. Hedging towards a falling rate is inherently risky, and not at all conservative. If the DCC was using this approach, they would currently be showing a profit (because interest rates are low). That they are showing a loss means that they are taking the conservative approach outlined above, hedging against rising rates, not taking speculative bets.

  14. Ro

    Thank-you distractedscientist. So this is a bit of a storm in a tea-cup, then. In years when floating rates have risen, this section of the accounts will show a notional surplus – though not any money in the hand. Is there any wizardry in identifying the floating rate against which to compare the fixed rate?

  15. Anonymous

    Noting that the prudent and conservative approach has resulted in a net loss of $24 million. Nobody in their right mind would have believed that interest rates would have gone up, in a flat economy dominated by US near-zero rates.

  16. Robert Hamlin

    Hi Distracted Scientist

    Let’s deal with these issues one at a time:
    “The exposure in Dunedin is the same as Auckland”
    Dunedin = 17.2 million/c. 40,000 = $430
    Auckland = 176.0 million/c. 560,000 = $314
    Dunedin’s exposure is approximately 50% more.

    ‘there is not a single accountant in Auckland or Dunedin who seems concerned’

    I suppose one will do to deal with this assertion. Here is a recent quote from a senior accountant in the Sunday Star Times:

    Accountant Stephen Stafford-Bush, chairman of the Institute of Chartered Accountants influential regional advisory committee, is more forthright, and says he believes the swaps were mis-sold in many cases. “The big question mark is have the banks acted illegally? Probably not. Have they acted unethically and immorally? In my view, yes,” he said.

    Finally let’s look at the mis-selling of these products. You state that:

    “In that light, it is worth contrasting DCC’s use of interest rate swaps with Hammersmith’s. DCC has fixed its rate, so as to protect against interest rate increases. Because interest rates went down, we’ve ended up paying more money that we might have. However, if interest rates had gone up, ratepayers would have had to pay more real money, if they had not fixed. This seems like a prudent and conservative approach.”

    A prudent and conservative approach for the DCC in a low interest rate environment would have been to either issue bonds or take out a proper fixed rate loan which would lead to predictable outcomes.

    All over the World banks are being picked up for mis-selling interest rate swap products. The key word here is ‘product’. It would be impossible to mis-sell a straight interest rate swap agreement as it would be impossible to misrepresent such a simple agreement. Misrepresentation of a product is an absolute prerequisite to mis-selling. However, this is not how interest rate swaps are presented to potential clients. They are bundled up, perhaps with multiple other swaps involving both interest and currencies. The swaps agreements themselves are often bundled with the floating rate loan that they are supposed to hedge against.

    The ‘product’ that results from bundling process this can be sold ‘off the peg’ as what looks like a cheaper alternative to more reliable bonds and fixed rate loans for the same capital amount, where the lender has to front up and calculate and price the risk up front. In the case of fixed loans this is done via a higher initial interest rate, and in the case of bonds by a lower up-front price paid by the lender for the principal and the discounted coupon rate that the bond represents. However, in the case of complex interest rate swap & floating rate loan package ‘products’ the actual risk to the client can be disguised and misrepresented in exactly the same way as the risk profile of sub-prime based collateralised securities were misrepresented in the bubble that led up to the 2008 crash. In the case of really big high value clients these products can be engineered on a case by case basis.

    I do not think that losses on this scale can in any way be represented as a prudent approach to borrowing, and unlike bonds the bad news with these things only reveals itself one year at a time. No overall assessment of the total potential exposure can be acquired unless the actual contracts can be acquired and studied. That is unlikely to happen anytime soon.

    To summarise – No prudent person genuinely believes in the concept of a free lunch – especially if one is being aggressively touted to you by a bank – Free lunches are only provided by your mates and if you think your bank is one of those, then your future is predictable.

  17. Calvin Oaten

    We are all missing the point: The DCC has been gambling on the Derivative market, no doubt. Worse, at the present it appears to have lost not less than $34 million. The point is: It has always been considered good advice to never gamble with money you can’t afford to lose. In this case the DCC is not only gambling with money it can’t afford to lose it is gambling with money it doesn’t even have! It is gambling on two fronts here which multiplies the risks.

    First, it gambles on interest rates going up or down (we don’t know which) via interest rate swaps (IRS) and depending on which side of the contract it is on (we don’t know which) determines who loses. At this point it is worth noting that banks never lose, witness today’s announcement of Westpac’s profit. Your friendly banker always projects the customer’s friend manner, but is only working for the shareholders. That aside, one side of the contract is fixed, the other floating. What do they mean by swaps? Just that, when the going gets tough the swaps kick in and who wins, the banks do, always.

    Secondly, the DCC is also gambling on currency ratios. This can have multi risks depending on which currency any tranche of debt is domiciled in. If it is in USD and the NZD increased in value against the USD then the debt suddenly increases with its associated interest. So it can be seen that depending on the placement of the debts the variability of the risks are almost infinite. Perhaps this is why John Key goes green in the face anytime anyone mentions devaluing our dollar. Just because the process meets standard accounting practice is no assurance whatsoever. It is straight out gambling with the DCC at present being on a losing streak which, as Rob Hamlin points out could be catastrophic in proportions.

    The fact of the matter is that under no circumstances should DCC Group staff be permitted to indulge in this sort of activity at all. If a project required borrowing to fund, it should be fully assessed as to the costs involved, complete with the associated debt servicing based on worst case scenarios re servicing costs. If this is feasible within the city’s constraints well and good. If not, then the project ought not proceed. It is just that simple. Would that the stadium was approached in this manner.

    What is happening is synonymous with one buying a house with 100% mortgage finance, and, not being satisfied with that, then buying a holiday home in Wanaka again with 100% financing. When faced with the fact that the total household income is insufficient to enable servicing of the debt, instead of selling the Wanaka home you then decide to increase your borrowing in order to invest in ‘Lotto’ tickets in the hope of winning sufficiently big to be able to pay down the debt to within your means of carrying it. Of course we know the odds of that happening don’t we?

    It’s worse that that, because this type of ‘Lotto’ is one in which from time to time it says, “Sorry, but the numbers have reversed, now you pay us the money.” It seems that this whole sordid business is rife around the world. Our local ‘rascals’ have just decided to join the game. Derivatives are what started the global financial crisis, GFC, back in 2007 and is still unravelling today; so just why our ‘rascals’ couldn’t see it and decided to join in anyway is one of this city’s crimes which will not simply go away. It is obviously committed for the ride, wherever that may take us, so citizens beware. Not only have we already lost $34m, we are in all probability going to lose more, much more.

    • Elizabeth

      I take the position that Dunedin City Council and its owned or controlled entities should not, in this course of history, be taken at face value, or indeed book value. Since, complacency towards council governance and financial activities is severely misplaced; it is exactly this that arrives us at the council’s current ability to form unprecedented levels of debt and the inability to identify and consolidate the true extent of debt and losses for ease of public consumption. This involves no conspiracy theories on my part, should anyone be asking. The alarms are ringing and it’s not a fire drill. With any non disclosure, or the fact of obfuscation (see DCC, DCHL, DCTL, Delta, Aurora, DVML, DVL annual reports, 2012 – or the stadium project as a whole), it’s best practice to expose and extinguish the seat of the fire.

  18. Anonymous

    I think a few present and ex-councillors might like to look up these provisions in the LGA:

    101 Financial management

    (1) A local authority must manage its revenues, expenses, assets, liabilities, investments, and general financial dealings prudently and in a manner that promotes the current and future interests of the community.

    (2) A local authority must make adequate and effective provision in its long-term plan and in its annual plan (where applicable) to meet the expenditure needs of the local authority identified in that long-term plan and annual plan.

    (3) The funding needs of the local authority must be met from those sources that the local authority determines to be appropriate, following consideration of,—

    (a) in relation to each activity to be funded,—

    (i) the community outcomes to which the activity primarily contributes; and

    (ii) the distribution of benefits between the community as a whole, any identifiable part of the community, and individuals; and

    (iii) the period in or over which those benefits are expected to occur; and

    (iv) the extent to which the actions or inaction of particular individuals or a group contribute to the need to undertake the activity; and

    (v) the costs and benefits, including consequences for transparency and accountability, of funding the activity distinctly from other activities; and

    (b) the overall impact of any allocation of liability for revenue needs on the current and future social, economic, environmental, and cultural well-being of the community.

    44 Report by Auditor-General on loss incurred by local authority

    (1) For the purposes of this section and sections 45 and 46, a local authority is to be regarded as having incurred a loss to the extent that any of the following actions and omissions has occurred and the local authority has not been fully compensated for the action or omission concerned:

    (a) money belonging to, or administrable by, a local authority has been unlawfully expended; or

    (b) an asset has been unlawfully sold or otherwise disposed of by the local authority; or

    (c) a liability has been unlawfully incurred by the local authority; or

    (d) a local authority has intentionally or negligently failed to enforce the collection of money it is lawfully entitled to receive.

    (2) If the Auditor-General is satisfied that a local authority has incurred a loss, the Auditor-General may make a report on the loss to the local authority, and may include in the report any recommendations in relation to the recovery of the loss or the prevention of further loss that the Auditor-General thinks fit.

    (3) The Auditor-General must send copies of the report to the Minister and every member of the local authority.

    Compare: 1974 No 66 s 706A

    6 Members of local authority liable for loss

    (1) If the Auditor-General has made a report on a loss to a local authority under section 44, then, without limiting any other person’s liability for the loss, the loss is recoverable as a debt due to the Crown from each member of the local authority jointly and severally.

    (2) If the members of the local authority or any other person or persons do not pay the amount of the loss to the Crown or the local authority within a reasonable time, the Crown may commence proceedings to recover the loss from any or all of those members.

    (3) Any amount recovered by the Crown under subsection (2), less all costs incurred by the Crown in respect of the recovery, must be paid by the Crown to the local authority concerned.

    (4) It is a defence to any proceedings under subsection (2) if the defendant proves that the act or failure to act resulting in the loss occurred—

    (a) without the defendant’s knowledge; or

    (b) with the defendant’s knowledge but against the defendant’s protest made at or before the time when the loss occurred; or

    (c) contrary to the manner in which the defendant voted on the issue at a meeting of the local authority; or

    (d) in circumstances where, although being a party to the act or failure to act, the defendant acted in good faith and in reliance on reports, statements, financial data, or other information prepared or supplied, or on professional or expert advice given, by any of the following persons:

    (i) an employee of the local authority whom the defendant believed on reasonable grounds to be reliable and competent in relation to the matters concerned:

    (ii) a professional adviser or expert in relation to matters that the defendant believed on reasonable grounds to be within the person’s professional or expert competence.

  19. Hype O'Thermia

    These are (e.g. “the loss is recoverable as a debt due to the Crown from each member of the local authority jointly and severally) about the councillors though aren’t they? What I am wondering is who is responsible for this latest in the DCC family of clusterfucks? Who (position, rank) decided, who was consulted & how fully did they understand? Is there any similar accountability among employees to that – above- regarding councillors? Is there, can there be, a clause in their employment contracts that spells out the same degree of responsibility and careful stewardship as in the above is the standard that is essential? How much autonomy do employees have to make decisions spending/risking $millions which the DCC has collected or borrowed on our behalf? Something is dreadfully sloppy about the practices which are gradually being revealed.

  20. Jacko

    The words of Thomas Jefferson in 1802 are coming home to roost, here in little old Dunedin.
    “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property – until their children wake-up homeless on the continent their fathers conquered.”

  21. Happy to go point by point.
    Dunedin’s exposure is approximately 50% more.
    36.9% seems closer to a third than a half.

    ‘there is not a single accountant in Auckland or Dunedin who seems concerned’
    I suppose one will do to deal with this assertion. Here is a recent quote from a senior accountant [Stephen Stafford-Bush] in the Sunday Star Times:

    We certainly do have to deal with this assertion. He was talking about farmers. Not Territorial Authorities. In fact, he goes on to say “… interest rate swaps were a commercial instrument suitable for large, sophisticated companies, not family farms.”
    Where is an accountant saying territorial authorities are misusing swaps?

    A prudent an conservative approach for the DCC in a low interest rate environment would have been to either issue bonds or take out a proper fixed rate loan which would lead to predictable outcomes.
    1. DCC does issue bonds, and the more recent ones, at low rates, ensuring the city does pay less interest.
    2. You then have a very emotive tirade about some ‘products’, but you have provided exactly zero evidence that the DCC or Auckland city are somehow being ripped off by the banks.

    Finally, to anyone reading this, you might find it illustrative to listen to Rob’s answer when Jim Mora asked him whether he’d checked his analysis over with anybody with a bit more accounting background.

  22. Calvin First, it gambles on interest rates going up or down (we don’t know which) via interest rate swaps
    Actually, we do know which. If they were gambling, then they would currently be in profit. Because the accounts are showing a loss, we know that they have hedged against high interest rates, which is prudent.

  23. Anonymous: Nobody in their right mind would have believed that interest rates would have gone up
    You might note that the DCC fixes some rates for terms in excess of 5 years. While it might seem not unfathomable that interest rates might not go up, that was not so in 2007 and before when some of these were being fixed.

  24. amanda

    Will it really take Dunedin people having their houses sold by demanding banks before we wake up to the stadium con and demand accountability for the near criminal negligence perpetrated by Syd and Hudson’s stadium cabal and perpetuated by Cull and Greater Dunedin’s gormlessness? Really?

  25. Calvin Oaten

    distractedscientist: Yours is a typical accountant’s response. Technically, the form of action pursued was possibly legally correct and accepted. But I argue that it is not, nor ever should be, the place for public servants to enter into variable risk activities – regardless of the legality – with the citizens’ treasure. Again, if a project does not stack up on the basis of conventional no risk financing, then it ought not proceed. End of story. The only way to overcome that would have been to – in the case of the Stadium – have had a ‘public referendum’, something which the STS folk valiantly fought for, but was denied by the then Mayor and council.

    If one searches the LGA as ‘Anonymous’ has so amply done, you will see that the restrictions as set out are deemed to prevent these various actions which have brought about these losses. Could this mean these actions fall outside the scope of the LGA? If so, then surely the liability as outlined in that Act must be actionable. You will, of course be aware that the Directors of the DCC Group of companies – including DCTL – are protected from any liability by an insurance cover funded by the DCC Group. This then surely, would put the insurance first in line for any liability for those Directors’ actions ?

    It is definitely, in my opinion, the lack of oversight, at best, by the Directors which allowed this situation to arise, by allowing, and indeed approving of these executives’ activities which have resulted in substantial losses being suffered, with, it would seem, contracts in place which could well result in these losses becoming very much greater before much later. If our elected representatives (who in all fairness are not expected to be qualified in the minutiae of detail, surely) had done any due diligence into the reports they would have immediately called for a full explanation of these actions with the ramifications associated. So it seems a case of lackadaisical performances all round, but no-one wishing to accept any responsibility for their actions. Shame on them all.

    • Elizabeth

      Or it’s the response of an interested lay person, with the intelligence to put verifiable analysis before claim – um, however it is that a ‘scientist’ might distractedly put it, for logical interpretation.
      Although I did wonder if distractedscientist works for the council or one of its entities.

  26. Nicks

    I know it destroys the whole narrative here but distractedscientist has done a great job explaining this – DCC and other Councils aren’t speculating and they aren’t making real losses that cost ratepayers any money. I would explain the accounting but to be honest it adds no improvements to what distractedscientist has already said. And it is confusing, almost to the point of being meaningless, and I doubt most accountants have a good handle on it. This it isn’t this type of non-speculative hedge the rules have been designed to protect readers of financial reports from. In practice the only loss here is paying banks more facility and interest fees. I would suggest Rob takes the stairs over to accounting, finds one of the professors that knows what they are talking about (hint: it won’t be many of them) and fully informs himself. You can choose to dismiss distractedscientist if you want but I’d suggest you don’t. The argument about the “product” is a whole other argument that shouldn’t be mixed up with the reporting of these “losses”.

  27. I do not work for the DCC.
    I think that Rob and Calvin would be better to stick to actual problems, such as DVL and DVML’s losses, rather than imagined ones.

    Nicks – seeing as you appear like you might know accounting, I’d be interested in whether you consider that DCHL is borrowing to cover their dividend costs?

  28. amanda

    It is interesting that we have two here who seem quite keen to create a ‘narrative’ along the lines of ‘nothing worth seeing here people, move right along now….’. Why? Obviously Rob has hit a nerve somewhere. Sorry Nicks and co. But the political context is that of a undemocratic council dominated by a group of seven who have plunged the city into massive debt after promising us that they would never do that, that the it would cost us a mere ‘$66 a year’. Yeah right. You just offer more smoke and mirrors to that underlying reality. Why, only you know.

  29. amanda

    It is not enough to say ‘it is too complex for mere non accountants to figure out so, just trust us’. When the city’s future is at stake (read people being thrown out onto the streets from their home sold to pay for Hudson’s intergenerational debt) I will respectfully say that I am not in the mood to trust individuals who support the current status quo of fiscal ineptitude.

  30. Ro

    “DCC and other Councils aren’t speculating and they aren’t making real losses that cost ratepayers any money.” This seems to be the guts of it… Are you contradicting this, Rob?

    And, Calvin, when you say “We are all missing the point: The DCC has been gambling on the Derivative market, no doubt” – are you standing by this claim? Can you point to the flaws in distractedscientist’s explanation that support your continuing to hold this position and demonstrate why we should share it?

    • Elizabeth

      Of course, nobody has yet explained anything. Because the DCC books aren’t transparent.

      PricewaterhouseCoopers commented on this fact post audit.

      • Elizabeth

        Way back when… (in general)

        Controller and Auditor-General
        (2006 publications; Local government: Results of the 2004-05 audits)
        http://www.oag.govt.nz/2006/2004-05/part3-1.htm

        3.1 Planning for transition to the New Zealand equivalents to International Financial Reporting Standards

        3.112
        A number of local authorities do use derivative financial instruments in their treasury operations, particularly interest rate swaps to reduce exposure to interest rate variability on borrowings. The accounting and record-keeping requirements of derivative transactions is proving a challenge for some local authorities.

        Summary

        3.138
        Accounting for financial instruments is expected to be the area of greatest challenge for the sector, although the effect on individual entities will vary depending on the nature of their assets, liabilities, and underlying transactions.

        Notes:
        1: The term IFRS is used to refer to International Accounting Standards Board (IASB) standards. The standards comprise International Accounting Standards (IAS), inherited by the IASB from its predecessor body, the International Accounting Standards Committee (IASC), and the interpretations of those standards; and International Financial Reporting Standards (IFRS) – the new standards being issued by the IASB, and the interpretations of those standards.

        2: NZ IFRS will comprise: New Zealand International Accounting Standards (NZ IAS), and the interpretations of those standards; New Zealand International Financial Reporting Standards (NZ IFRS), and the interpretations of those standards; and New Zealand Financial Reporting Standards (FRS), where there is no equivalent IFRS.

        You might like to read this:

        Auditor-General’s overview
        Local government: Results of the 2010/11 audits

        See Section A (left-hand menu)
        http://www.oag.govt.nz/2012/local-govt

        Thus:
        Part 4: The financial reporting environment

        Reducing complexity
        4.20
        Since the introduction of NZ IFRS, most public sector entities’ financial statements have become larger and more complex, with more disclosures. We continue to question whether the volume of information contained in financial statements properly meets the needs of those who typically read the financial statements. There remains a risk that readers are being presented with too much information, which makes it more difficult to “see the wood for the trees”.

        And,

        Determining which entities combine to form a group

        4.32
        Which local government entities combine to form a group is important. Group financial statements affect the transparency of reporting and accountability, because they show the combined resources, and use of resources, by a “parent” entity.

        4.33
        “Control” is the accounting concept used to determine which entities are combined to form a group. Financial reporting standards provide a lot of guidance about what “control” is in a financial reporting sense. This guidance focuses on the substance of arrangements, not on the meaning of the word “control”.

        4.34
        Even with the guidance provided in financial reporting standards, assessing whether or not an entity controls another in the local government sector can be difficult. This is particularly so for entities such as trusts, which have no formal ownership instruments. Working out whether entities such as trusts are “controlled” for financial reporting purposes remains challenging. The standards need to be clearer.

        4.35
        In our view, the NZASB needs to clarify what “control” means for entities with no formal ownership instruments. We consider that it is important that the entities that are combined to form a group keep focusing on the substance of arrangements and present useful information.

  31. Nicks

    Based on public comments it is obvious that it happened in 2011/12 and that they don’t intend for it to happen in 2012/13 – take that to mean what you like! The extent seems to be the most contentious. Just a cursory glance at DCHL’s cashflow statement would suggest to me that they funded the dividend like this – cash flow from operations $4.8m, realised investments $2.2m, borrowings $3.7m to get the $10.7m dividend paid. That doesn’t take into account how the subsidiary entities themselves funded the dividends paid to DCHL. Some people might suggest that it is a simplistic view of the cashflow application but if the above isn’t true then it just means that DCHL are borrowing to cover their interest payments. Neither option is sustainable – if you can’t fund a dividend from your cash flow from operations you probably shouldn’t be doing it.
    amanda – I couldn’t care less about whether people continue the debate on this matter or not. It just seems to me that people are going off on inaccurate information. If Rob can show how these losses cost ratepayers money then by all means, I just don’t think he can. This hedge doesn’t have a cashflow impact beyond the fees and the interest. You can’t group all hedges into the same basket and that is what Rob has done.
    By the way I actually said it was too complex for most accountants to figure out not just non-accountants….

  32. amanda

    Yes. Yes. I know you did. Here’s what I see. You have suddenly come on this site and are at pains to dampen down any attack on council spending on this subject. You clearly are switched on but have not been too interested in sharing your insights on the fiscal ineptitude of the council in the past. Therefore I have to put your contribution here into political context. You are prepared to defend this council spending now; that is interesting and tells me you have an agenda and that agenda seems to be some sort of an ‘apologist’ for council practice. It’s not just what people defend that shows their political agenda, but what they don’t bother to defend.

  33. Calvin Oaten

    Ro: If you haven’t already got a copy of the DVL report plus the DCC Annual Report to Y/E 30 June 2012 then I suggest you get them. In the case of the DVL go to page 6 where it shows for the year after subvention receipt, tax credit etc a Loss for the year net of taxation of ($4.312m) followed by interest rate swap losses during period at ($8.579m) for a Total comprehensive loss for the year net of taxation of ($12.891m). If you can deduce anything but a IRS loss out of that then show me.
    Moving on to the DCC Report see page 109 Cash flow Hedge Reserves core council actual 2012 ($24.604m), the Consolidated full group shows ($34.388m) which is the combination of the $24.604m plus DVL’s $8.759m plus a little bit more. Moving on to page 146 this is confirmed as: DCC core at ($17.906m) in 2011 plus ($6.698m) in 2012 to total ($24.604m). Further, the consolidated group shows in 2011 ($17.713m) plus in 2012 ($17.211m) to total ($34.388m). On page 179 under Financial instrument exposure is: derivative financial liability at $36.649m.
    On page 182 the following:
    “The Group uses interest rate swaps to manage its exposure to interest rate movements on its multi option note facility borrowings by swapping a proportion of those borrowings from floating rates to fixed rates. The treasury policies of each company recommends that the level of fixed interest hedge should be limited to a series of ranges within set debt time periods.
    The notional principal outstanding with regard to the interest rate swap is:
    Consolidated
    2012
    maturing in less than 1 year – $16.500m
    maturing between 1 and 5 years – $143.000m
    maturing after 5 years – $132.000m
    ——————-
    Total $292.000m

    This swap liability must be considered against the fair value of the bond debt that the swap is intended to hedge. The fair value of the bond debt is now $29 million below (2011 : $26 million above) the carrying cost in the balance sheet.

    It should noted that nowhere does it take cognisance of currency parity. This is of course a whole other risk factor.

    So maybe Rob is not the only one who should trot across to Accounting.

  34. BillyBob

    Nicks and Distractedscientist – thanks for injecting some commonsense into this argument. As I’m sure you’ve worked out by now, the majority of posters on this site see an assassin on every grassy knoll.

    • Elizabeth

      Welcome BillyBob, you must be UglyBob’s cousin (Skyscraper City). With mention of the grassy knoll and all, which means a lot in the Octagon, Dunedin.

  35. Calvin Oaten

    Nicks; You suggest the DCHL payments totaling $23.2m was arrived at through Cash Flow. If you look at the term Borrowings you will see that they increased from $543.220m in 2011 to $557.399m in 2012. Difference $23.179m, how convenient that this should perhaps provide your cash flow to meet the DCC’s requirements.

  36. amanda

    If this site is so silly and ‘crazy’ why do you bother to read it BillyBob? Because it worries you? Calling us ‘naysayer’ or ‘crazy’ points to the fact that you don’t have a cogent argument to make, otherwise you would make it wouldn’t you, just like others here who say it a bit smarter and tell us all that the situation is just ‘too complex’ for us to understand. But nonetheless you serve a useful purpose so Welcome BillyBob.

  37. Russell Garbutt

    Interesting discussions, but not a lot of clarity. Seems to me that accounting, and its associated cousin, auditing, should consist of pretty basic stuff. Money in, money out. Difference is either a profit or a loss.

    What this City has been doing for years is ensuring as best as it can, that as few people understand exactly what is going on with what. Athol Stephens is a past master at this exercise in turning simple concepts into confusing ones. The structure of the Council was designed to further confuse and as an incidental effect make the possibility of personal gain to Directors from basic Council activities a lot easier. This is a small City of 57,000 ratepayers and yet we have a plethora of companies, entities, different entities with exactly the same Boards, inter-company trading and still swags of highly paid Directors that seem to enjoy taking their fees but running for the hills as soon as someone talks about accountability.

    My starting point is this.

    The last Council – largely consisting of both Councillors and staff from this current Council – promised us all a whole lot of things including private construction funding, $66 per year on the rates, operational profits on the stadium – I could go on and on for ever. None of it happened. Largely it was all smoke, mirrors and what I heard the other day described as Bovine Effluent Effects.

    About the only person I trust within the Council staff is Paul Orders.

    I’d like him to take a lead on this issue of interest rate swaps and come out with a definitive statement that the average ratepayer can understand and which is verifiable. He could then do another statement with cartoon drawings so that some of the Councillors could understand. Not all, but certainly those that still can’t see the stupidity of their past decisions have already admitted that they don’t know how to read a balance sheet.

    I’d also like him to actually tell us all what he believes the total annual ownership and operational losses of the stadium actually are. Can he explain perhaps why, according to a Board Director, losses can overlap and therefore can’t be simply added together.

    Lastly, maybe Paul Orders could tell us why it wouldn’t be a good idea – purely for clarity – to get rid of all these entities and put most Council operations and activities within the Council.

  38. Robert Hamlin

    “DCC does issue bonds, and the more recent ones, at low rates, ensuring the city does pay less interest.”

    That’s an interesting comment distractedscientist. How do you come to know that? I don’t recall seeing that level of detail of any recent cheapies in any of the annual reports that I have seen. That kind of detail is most useful to an informed discussion, and you do seem to be a most remarkably well informed fellow. Can you tell us more as part of your case for the defence?

    DCC Bonds and notes currently on issue are summarised on page 152 of the 2012 annual report:

    a) $40m issued for 3 years, maturing 14/6/13 at a coupon rate of 5.55%
    b) $20m floating rate notes, maturing 15/02/13 at a margin of 50bp over BKBM
    c) $50m issued for 8 years, maturing 15/11/13 at a coupon rate of 7.07%
    d) $75m issued for 5 years, maturing 25/11/14 at a coupon rate of 6.40%
    e) $50m floating rate notes, maturing 15/10/15 at a margin of 90bp over BKBM
    f) $90m floating rate notes, maturing 15/04/16 at a margin of 107 bp over BKBM
    g) $50m issued for 10 years, maturing 15/11/16 at a coupon rate of 6.79%
    h) $60m issued for 10 years, maturing 15/10/17 at a coupon rate of 7.81%
    i) $50m issued for 7.5 years, maturing 15/7/18 at a coupon rate of 6.57%
    j) $15m issued for 10 years, maturing 17/12/18 at a coupon rate of 6.85%

    As you can see distractedscientist, none of these bond issues postdates mid 2010, and they seem to have a steady rate of maturation of about a couple & about $50-75 million a year. So where are these recent bond issues that you seem to know about, and it seems that those who wrote the most recent annual report don’t? We do seem to be missing about two year’s worth, about four or five issues and around $100-150 million at historic issue rates – Which does beg the question of what they were rolled into when they matured (the DCC will not have had the cash to retire them). Are these absent friends the ones that you are talking about? Further details of more recent events and what has replaced these retired bonds/notes would be great if you have any access to them.

    As to the absence of accountant comment, many are afraid to comment in public, they simply comment on the basis of anonymity, or they may use pseudonyms to comment in public with their identity, profession and employer disguised – as you do. The very people that you are arguing with here could be accountants and/or DCC employees for all we know. I know many accountants who were very unhappy about the financial forecasts for the FB stadium upon which the decision to build it was based, and with good reason as subsequent events have proven. They also did not comment in public – the reason – Fear.

    As to the availability of specific evidence of misuse/mis-selling, apart from the mounting losses and their close parallels in Europe where both governments and court action has produced it aplenty, there is none as yet. These contracts are secret and both parties are likely to be highly motivated to make sure that they remain so. On the only recent occasion that I have had cause to be involved in a determined effort to get specific details (evidence) on one aspect of the DCC’s borrowing activities, the specific information that we sought under the LGOIMA as evidence of the kind of conduct that you are talking about was defended desperately, and eventually successfully, by DCTL all the way to an Ombudsman decision. Ironically, the borrowing activity that we were interested in was a bond issue!

    Given this outcome/decision, I now suspect that only direct central government intervention, and subsequent court action would extract the type of concrete evidence that you seem to be looking for from behind the veil, as it has done overseas. I would suspect that if this happens at all, it will only happen if matters deteriorate substantially. We shall see.

  39. UglyBobNZ

    Hi Elizabeth, BillyBob is no relation although given I’ve been doing some recent genealogical research you never know. Best not to mention that particular “grassy knoll” – it would be the equivalent of assasination by a BB gun…

  40. Anonymous

    It seems clear that from the maturation figures above, the hedging strategy is entirely wrong and will cost in the tens of millions each year for the next 10. I take the point that it might not have been obvious that interest rates would not go down in 2007 onwards (although I called it correctly, and also called a 7 year period of recession or flat growth). However, they were still hedging against high rates as recently as 2012, from when it should have been completely obvious that rates were not going to go up. When did/has the strategy changed? If it hasn’t the losses will continue to mount and in no way can it be described as prudent.

  41. Nicks

    Calvin – that is possibly too simplistic. For it to be true you should be able to do the same cash flow analysis for each of the subs that paid dividends to DCHL. Capital expenditure can muddy the waters and so can talk of optimal debt/equity ratios. Without looking through all the subs I think you would need to show a clear pattern that the subs who have paid the bulk of the dividends have also incurred equal levels of debt increase. And you’d have to understand whether or not the debt was actually earmarked for capex. Only the companies themselves could answer that. DCHL is simpler because it doesn’t have capex to worry about so you can draw clearer conclusions. I think it is unlikely that the group debt increase all relates to those dividend, interest and subvention payments. I would suggest it is greater than the $3m I highlighted above and less than the $22m figure you have suggested which isn’t a very helpful answer!

  42. Rob – The mid-2010 bonds were the ‘recent’ ones to which I referred. It depends on your timescale. And those 2010 ones are at a much lower rate than the ones from 2008 and before.
    My reading of the annual report is that the city has not issued further bonds because they are sufficiently comfortable with the medium term low growth forecast to move to a higher proportion of their borrowing floating (much like NZ homeowners, who are now much more likely to be floating than any time in the past decade). It seems that there is a greater proportion of borrowing via the multi-option note facility. If you look at Dunedin City Treasury’s accounts, you’ll see in the Maturity analysis that more of the debt is now short term relative to 2011.
    And to accountants’ lack of comment, Larry Mitchell is pretty rude about Dunedin’s borrowing and the stadium. He spends plenty of time looking at local government financials, and he has not voiced any concern about interest rate swaps. Perhaps that is because he knows that the borrowing, and the ability to pay is a problem; but that the interest rate swaps are sensible and prudent?

  43. I’m occasionally wary of the cost involved with transparency, but I find the Gisborne District’s CEO chatty style quite refereshing:
    “February Result [2011]
    The operating surplus was $918K ($309K January) compared to a budgeted surplus of $1,309K ($1,172K January). This represents a $390K adverse variance to budget. The key driver was the paper loss recorded for interest rate swap revaluations. This reflected the drop in short term interest rates as a result of the Christchurch Earthquake.”

    Perhaps Paul Orders could provide some similar commentary so that there is a better appreciation of what is going on.

  44. Calvin Oaten

    Nicks; you talk of doing a cash flow analysis of the subsidiary companies in order to see the true story re the source of dividend funds etc. Several points. The DCC requires and receives its dividends and interest payments from the consolidated results of DCHL. The ‘subvention’ payments to DVL seem to have come direct from Aurora – the only really profitable one of the group – and is noted in the consolidated accounts of DCHL. Then, one is not privy to the full accounts (if there is) of the subsidiary companies. As far as I am aware they are not readily available to the public. This then would indicate that perhaps you Nicks, are an insider which of course would tend to engender a biased, if not defensive approach to the discussion. Could I therefore ask you to declare your position in order to clarify your bona fides, and at the same time advise the ready availability of said reports?

  45. Anonymous

    If the Kiwi dollar rises – for example past 85 cents – how would it impact on the interest rate swap? And in this Stuff story the chief economist ‘believes the kiwi will move upwards in the next five or so years’. Will this increase the risk or decrease it? Or is this just the government or big banks feeding the media positive sop following the negative publicity about their profit maker?

    BNZ sees kiwi above US85c
    By ANDREA FOX • Last updated 05:00 07/11/2012
    http://www.stuff.co.nz/business/industries/7914623/BNZ-sees-kiwi-above-US85c

  46. Calvin Oaten

    distractedscientist; you’re implying that the DCC being involved in IRS activities is quite in order, as it is accepted practice by many other similar organisations is spurious. To suggest it is OK because it follows standard accounting procedures is also a cop-out. For the DCC to indulge in large non infrastructure, non strategic, totally debt funded projects which will have a known predictable negative revenue flow is bad enough in itself, but to then engage in a form of ‘two-up’ ‘heads or tails’ type of gambling on the costs of servicing that debt is foolhardy to say the least. That it fits your accounting standards is no sinecure. By its very term, accountants simply observe and account procedure. They are not interested in outcome, unless of course they have an interest in the venture. They simply report. I have heard it said of accountants that they are very similar to the extinct ‘Mot Mot’ bird, which forever flew backwards looking at last years figures. What the DCC is doing here can only be described as, at best reckless, and under the terms of the Local Government Act 2002 may well be unlawful. These actions should at least, be tested.

  47. distractedscientist says … “And to accountants’ lack of comment, Larry Mitchell is pretty rude about Dunedin’s borrowing and the stadium. He spends plenty of time looking at local government financials, and he has not voiced any concern about interest rate swaps. Perhaps that is because he knows that the borrowing, and the ability to pay is a problem; but that the interest rate swaps are sensible and prudent?”

    “Not voicing concern” does not translate to “approves” or “concurs”. Just two points … These financial instruments, including IRS’s demand a high degree of qualified-skilled supervision and management on the part of the non-banking counter-party (DCC). Many Councils use IRS’s to hedge their borrowing risk. Is the DCC appropriately skilled and are elected officials aware of and accepting of the inherent risks? … these are the real questions. I have no special knowledge as to the answers!
    Larry Mitchell

  48. Thanks Larry. I agree.
    I’m sorry if I slightly oversold your position. What Calvin and Rob seem to be suggesting is that any involvement in the IRS market is irresponsible gambling, and should immediately be stopped, whereas you would argue that it is acceptable practice given adequate skill and oversight.

  49. Hype O'Thermia

    distractedscientist, I think Larry’s “Is the DCC appropriately skilled and are elected officials aware of and accepting of the inherent risks?” explains why, in your words, “Calvin and Rob seem to be suggesting is that any involvement in the IRS market is irresponsible gambling. Both have been watching the DCC’s relationship with money and in that time have observed a consistent pattern of recklessness and/or ignorance. With an organisation that has demonstrated poor decision-making capability so thoroughly, it’s like putting a toddler in charge of a wrecking ball.

  50. Nicks

    An insider! You are kidding yourself if you think DCC has anyone as smart as me! But seriously aren’t the subsidiary accounts just available at the link provided on this website? Under the post called “Dunedin City Council – all reports posted, belatedly!” I haven’t examined them all but they all look like annual reports for 2012 to me.
    I apologise if I have given the impression I am defending the DCC – I’m not. I was adding my thoughts on the debt for dividends as I was asked to do – I think it is stupid to raise debt to pay dividends for just $1 let alone at least $3m and perhaps much more. I was unaware that the dividend had to be from the group results but you still need to understand what entities in the group are generating the debt versus generating the income used to pay the dividends, interest etc. At the moment you have just drawn a conclusion based on the fact two numbers are very similar, that isn’t to say it is the wrong conclusion though. Two other similar numbers in DCHL’s cashflow are interest received $1,019 and net GST paid $1,036; you’d be completely wrong to suggest these numbers are in some way related but they sure look like they are!
    As for the interest swaps I haven’t added any comment endorsing them or otherwise I have just pointed out that the losses are not what they have been interpreted to be. Calvin pointed out some numbers in a previous post around the cashflow hedge reserve and the liabilty – when the hedge meets maturity those numbers are netted off each other and the residual amount (usually small if the swap is perfectly hedge) is a “real” gain or loss. I repeat again these cashflow losses have not cost the ratepayers anything approaching $22m of real money in the last two years. They have just cost the fees to enter into them, it just so happens they haven’t been of value lately.
    Anonymous made a comment “However, they were still hedging against high rates as recently as 2012, from when it should have been completely obvious that rates were not going to go up.” It is important to note that they won’t have entered into hedges lately to protect against “high rates” they would be for “higher” rates then they currently have. Maybe it is obvious rates aren’t going up now but what about next year or the year after? I can’t tell you the answer as to how the strength of the dollar would impact these hedges but my understanding is that it will only impact them insofar as the strength of the dollar influences interest rates – the dollar and the hedge aren’t directly linked.

  51. Hype: it’s like putting a toddler in charge of a wrecking ball
    Or not. Dealing in swaps, and making long term ‘investment’ decisions are very very different skills. Just because someone is a car thief, doesn’t make them an art thief.
    I had a friend who worked in swaps for a bank. He trained as an engineer, but the type of calculus involved in that market meant the bank preferred to employ engineers and pure maths graduates over commerce graduates. I’d guess therefore that either there is a specific employee who has expertise in this, probably working for Dunedin City Treasury, or it may be that they contract this work out, given its specialised nature. This would mean that the link between poor decision making elsewhere and the decision making over IRS is weak. The decisions this person or organisation makes may well be approved, but I suspect it is approving things such as: I can cap our interest rate at X for $Ymillion for Z years. Would you like me to proceed?

  52. Hype O'Thermia

    Hmmm, distracted. I see what you mean, but overall DCC’s record is so bad that IF they have someone with that expertise doing this side of the biz it’ll be purest accident :)

  53. Russell Garbutt

    distractedscientist, you are making some pretty radical assumptions regarding a suitably qualified person working within DCTL to make these hightly complex decisions or recommendations.

    The last Council in particular has provided ample evidence that they are financially incompetent and I challenge anyone to provide evidence to the contrary.

    But not only that, the model they have been following in appointing “professional” directors to Council owned entities has proven to be equally, or more, incompetent. We only need to look as far as Delta, where I suggest that the incompetency has been supplemented by what many believe to be fraudulent behaviour connected to the land speculation with “friends”.

    Until someone like Larry Mitchell – a person with widely acknowledged expertise – has open access to the full DCC financials and works constructively with the DCC to identify ALL the issues, uncover ALL the shennanigans, has the power to fully investigate ALL the concerns raised by concerned ratepayers, then there will ALWAYS be the belief that we are being kept in the dark and fed Bovine Effluent.

    Makes you wonder why the DCC wouldn’t take advantage of his expertise doesn’t it?

  54. Hype, I’d suggest that lots of bits of the council seem reasonably competent, but it’s a lot of the big strategic stuff that they come unstuck on. The libraries seem well run, but the decision-making about building new libraries etc. Delta appear to be able to mow lawns and fix roads, but not so good at property investment. The Botanic Garden is great, but the plans to close Lovelock Ave, build new green houses etc. At least some of that failure at a strategic level has to sit with council as well.

  55. Hi Russell, I agree with you with respect to the council’s ability to make an informed judgement on such things. Irrespective of whether the person(s) doing the swaps is doing a good job, I very much doubt that the council have any idea of whether it’s a good job, if and when they approve the swaps.
    I’d also really welcome the council employing someone independent like Larry to have a good look all the way through. The council is incredibly complex. Some of this is necessarily so, but some of it may be for obfuscatory purposes. Personally, I don’t feel in the least bit qualified to comment, so it would take someone with very deep expertise to get to the bottom of it. There are plenty of things that could be legitimate, but that might not be. Or things that appear dodgy that might be for quite legitimate reasons.

    • Elizabeth

      Now you sound more awake to where people are coming from, distractedscientist.
      It helps to have larry mitchell listening in here ;)

  56. Russell Garbutt

    I think that it is more than plain that something is nasty in the woodshed and we have a lot of woodsheds. I come back to my point that for a City that is smaller than most suburbs in London, we have a lot of complex nonsense.

    The ways in which “directors” are appointed to City entities is just one example of how things are opaque. Remember how Paul Hudson got appointed to God only knows how many Directorships as well as sitting as a Councillor. That cost the City something like quarter of a million dollars a year for that privilege, and can ANYONE apart from Mr Hudson himself point to any good that came out of it?

    I’d be delighted to see some of our rates going into employing Larry Mitchell to give an in-depth review of our Council provided that any report was transparently provided to ratepayers as well as Councillors. Perhaps, distractedscientist, you could suggest to the City the wisdom of getting some good advice from Larry Mitchell?

  57. amanda

    And more to the point Cr ‘Intergenerational Debt is Good’ Hudson wants to be returned to council at next year’s election. Or will he spare us that? And if he does decide to step aside, which debt lovin’ muppet will be chosen to take his place?

  58. Calvin Oaten

    distractedscientist: your last post reinforces the point that the DCC shouldn’t be involved in these complex deals at all. There is a lot to be said for ‘sticking to your knitting’. In a word, your arguments have done no more than muddy the pool, and by your own admission you don’t understand the processes any better than anyone else.

  59. Calvin, you do realise that if the DCC got a vanilla fixed rate mortage from BNZ instead of using interest rate swaps, they’d still have a big ‘loss’ in their accounts?
    You are the one muddying the waters. You would be far more effective to sticking to emphasising the city’s debt levels than crying wolf over interest rate swaps.

    DCC should do things to reduce their debt levels, which might hopefully have a flow on effect to my rates. If they can save money by safely using interest rate swaps, then I think they should.

    • Elizabeth

      The point is that everyone here is welcome to explore the issue(s).
      This is exactly what I sought at ODT Online, also. However, since then the chickens have entered some dustbath over the Bledisloe Cup match, part equaliser for the DCC $460,000+ ORFU bailout. Yawn.

      Views are high across the last days, thanks for keeping everybody entertained and informed.

  60. Calvin Oaten

    distractedscientist; of course they’d still have a big ‘loss’ in their accounts. But I doubt that it would be because of the interest rate per se, but rather because the debt is way too high in the first place. The higher the debt the higher the interest cost, regardless of the rate. To try to juggle the rate to mitigate it by using IRS is reckless. As you say, “if they can save money by “SAFELY” using interest rate swaps, then you think they should.” Your words not mine. My contention is that they shouldn’t need to have to try, whether safely or not. Any flow on to your rates reduction is not likely in your lifetime.

  61. Rob Hamlin

    We seem to be circling a bit here. New information is needed. However, I think that this has been one of the best threads on here for a good long while. Both sides of an argument presented competently, vigorously and with a pleasent level of urbanity. It’s been a pleasure doing business with you distractedscientist & Nicks. Be good to see you become regulars.

  62. Elizabeth said: “It helps to have larry mitchell listening in here ;)”

    Larry here … and “listening”.

    FYI, I am about to offer the DCC some professional advice/services relating to their “performance improvement” … at modest cost as soon as I can get my hands on a copy of their 2012 (audited or not) Consolidated financial report. Help! … anyone … to larry@kauriglen.co.nz
    Will advise.

    Larry of Puhoi

  63. Calvin: My contention is that they shouldn’t need to have to try, whether safely or not.
    Yes, but unfortunately they do have to try

    Rob: I am a semi-regular here. My picture stays the same, but due to some odd wordpress thing, my name changes.

    Larry: Thanks for dropping in; I really hope the DCC take you up.

    And I’d just like to conclude by re-posting something that Elizabeth posted above:
    Reducing complexity
    4.20 Since the introduction of NZ IFRS, most public sector entities’ financial statements have become larger and more complex, with more disclosures. We continue to question whether the volume of information contained in financial statements properly meets the needs of those who typically read the financial statements.
    There remains a risk that readers are being presented with too much information, which makes it more difficult to “see the wood for the trees”.

    This is certainly true of the DCC’s accounts. I am still of the mind that the IRS swap ‘loss’ is a tree in that analogy.

    • Elizabeth

      As if to illustrate 4.20, distractedscientist, but before reading your comment tonight I had asked Cr Lee Vandervis how he found the council meeting at which councillors missed or ‘skimmed’ the DVL/DVML reports… given the lack of warning by all those supposed to serve them well, amongst other impediments to councillor performance. I’ve lightly edited beginning and end […] at my discretion.

      His email reply:

      —– Original Message —–
      From: Lee Vandervis
      To: Elizabeth Kerr
      Sent: Thursday, November 08, 2012 9:50 PM
      Subject:

      The meeting was ugly and Cull was so uptight…
      Chris Morris fairly reported Cull’s several attempts to shut me down, and Cull seethed with my dogged claims of a 25% rates rise being made to look like 5% by DCHL borrowing.
      The failure of DCHL to earn anything and my repeated claims that all funding for the stadium had evaporated with this DCHL annual report was hit home as hard as I could, and repeatedly.
      I complained of the opaqueness of the DCHL report, the difficulty in finding the figure for this year’s new borrowings despite the $23.2m dividend/subvention/interest figure appearing all over it – at least five times.
      I described how in desperation I had rung Calvin Oaten to tell me where the new debt figure was in the DCHL report, and that when Calvin gave me the page reference I still needed a calculator to find what it was. The massive increase in debt figure did not even figure on the whole page of GROUP FINANCIAL STATISTICS!
      We knew that the DVL/DCHL result was millions in losses, but the elephant in the room that I focused on was the DCHL report and its appalling $23.2m borrowing bailout, and repercussions for all Stadium funding.
      I did not get time to look at any of the other Annual Reports prior to the meeting because they were two inches thick altogether and there was so much to complain of in the DCHL report that really mattered and summed them all up anyway.
      Making an issue of the DVL/DCHL skimming reports is simply a distraction from the complete funding failure elephant in the room.

      …feel free to quote if you think it helpful.

      Cheers,
      Lee

    • Elizabeth

      I did some checking at the Dashboard, as distractedscientist says, his picture (gravatar) stays the same. Sometimes he’s a number, other times he’s James.

      • Elizabeth

        Hilary Calvert scored a free book from ODT for writing a letter to the editor on the need for accurate, timely and readily understood information to guide decisions.
        What to say.
        Further, ODT (10.11.12, page 34) directs readers to its website where the letter “can be viewed” at http://www.odt.co.nz/opinion
        Alas, no sign of it. To prove (once again) the newspaper is struggling with the internet revolution, and subediting.

        I had read it in the tree version, marvelling then that ODT hasn’t sent an entire library to Calvin Oaten, in recognition of all letters and opinions he has furnished to the ODT editor – some of which don’t make it into ink. A plague upon that media house for not sharing!

  64. Interesting to see the Mayor’s response to Calvin’s letter today. DCC communications obviously actively reading this thread.

    {We like to think so. -Eds}

  65. Anonymous

    Pity the Mayor kicked off with the usual passive insult. Unfortunately not a surprise too. Laughed though how he tried to make out he knows what is going on – my wasted ratepayer money is on the middle passages being scripted. Unless I’m the only one seeing a difference between those and the familiar Cull comments start and end.

    • Elizabeth

      Yes, highly unlikely Mr Cull has any authority to comment on high finance or be extolling the virtues of the financial derivatives market as may apply to whether council is prudently managing “ratepayers’ money” (call it what you will, was it over $800 million of council debt in the name of the Dunedin ratepayers).

      We will provide copy of Calvin Oaten’s letter to the editor and the mayoral ghost writer’s reply, here, later today.

  66. Peter

    To be fair, a lot of people would be out of their league in trying to explain this seemingly technical financial stuff. I only need to know the guts of what it is about. (Still, not sure to be honest) If I was Dave Cull, and felt the same, I’d probably get myself a ghost writer. My only concern would be whom the advisor was who wrote the response and whether that person, and their judgement, could be trusted.
    I presume Athol Stephens, the CFO, had a hand in advising Dave Cull on this?
    I know people will say ‘Well, he’s the Mayor and he should know what this is all about’, but is anyone an expert on everything?

    • Elizabeth

      I would’ve expected DCC chief executive Paul Orders to comment – given the problem with where the CFO sits. The mayor could have simply acknowledged who the advice was sought from; for example, was it was from the chairman of Dunedin City Treasury Ltd.
      We already know from annual reports of the Office of the Auditor General (OAG) that local authorities are using financial derivatives including interest rate swaps, the question remains are they doing so responsibly. That can only be answered by independent scrutineers with expertise in these products. The OAG’s opinion has been that financial advisers are failing to adequately explain financial derivatives (the product) to their clients. Acknowledging DCC has surpassed its prudential borrowing limit as set by council policy, as well as having not adhered to council policy for transparency, together with the fact that DCHL has reached its borrowing limit, how much risk is DCC exposed to through playing the financial markets ? Are we SAFE AS HOUSES.

  67. Hype O'Thermia

    Nobody is an expert on everything, Peter, nor expected to be. But were I in his position I’d get an expert to explain it to me in simple language until I understood well enough to explain it to a third party if necessary. That’s what you do when you’re at the top where the buck stops – or used to when there was more honour than money as the motivator, giving back to the community when one had been successful and in the process gained the trust and respect of the community. You don’t go burblyurblyurble and then, when things get really ugly, say “I know nutheeeen, I was asleep/away fishing at the time.”

  68. Peter

    ‘Are we safe as houses’? Certainly a lot of citizens haven’t felt safe for a long time-whether on an international, national or local level.
    On the local level the financial difficulties have been well rehearsed and, surprise, the people who got us there are largely still…..there. A change of personnel – clearing out the deadwood – gives fresh hope.
    The appointment of Paul Orders after the long, dark Harland years was welcome. This was one of the good things the Cull Council has done by appointing him. He has done some good things and he is more trustworthy, and likeable, than Harland. I do wonder, however, if the reform process has now stalled through political interference and lack of will throughout the DCC. Some of those pulling levers in the background are still around and show no sign of going. The reform of DCHL is starting to look cosmetic and, of course, Dave Cull and Co show no interest in real accountability. In the next election the new buzzword should be accountability. (Transparency was the favoured one last time around.) We only have to find people to elect who mean it.

  69. JimmyJones

    Not, SAFE AS HOUSES, Elizabeth. Not safe because of the size of the debt. The DCC seems to be always on the edge of a credit rating downgrade. The warnings from Standard & Poors are read and not understood by the councillors, but the staff do.
    As far as I can tell interest rate swaps are a good thing because they remove the risk of interest rates increasing – in fact they transform a floating interest rate into a fixed interest rate. Fixed rate loans are useful when budgeting for new projects and creating the LTP and determining the rates increases. I don’t see why there should be any risk with interest rate swaps, unless they bought the wrong ones. There seems to be no indication of any problem, it should be the job of the OAG to tell us, but they don’t seem to be on top of things.
    DCT pays an average interest rate of 7.2% (FY 2012) including interest rate swaps. DCT has one employee who gets paid lots, and does little (mostly).

  70. Rob Hamlin

    “…interest rate swaps are a good thing because they remove the risk of interest rates increasing – in fact they transform a floating interest rate into a fixed interest rate.”

    If that were the case Jimmy, then it would be impossible to mis-sell the things, but they have been mis-sold – the World over. Simple interest rate swaps should be a zero sum game if they are hedged properly, but I have never seen a bank aggressively sell anything that is a zero sum game to them, and these things have been exceedingly aggressively sold to all and sundry in this country. Thus it may be reasonable to presume that the banks expect to win consistently. As it IS a zero sum game overall, that seems to make it reasonable to suppose that they expect the other guy to lose consistently, and it looks like they have been.

    Let me give you an actual example of these charming folk in action:

    My father opened his first account with bank ‘X’ in the late thirties. I opened an account with the same branch in 1975.

    In 1992, they were retired and had a house worth c. 150,000 GBP

    I returned from the United States in 1992, and was looking to set up a business. On top of my own assets, I needed to borrow 100,000 GBP.

    As I had spent my time in the USA doing financial analyses I had created a fairly sophisticated model of this business and had worked out that I could stand an interest rate of around base plus 2%. The skill to do this was atypical of the average ‘start up joe’.

    One option to raise the money was to borrow it off the bank. I went into the branch of which I was a second generation customer. Here is how the conversation went:

    Me: have you seen my proposal?

    BM: Oh yes, I think that we can see our way to backing you up on this one. We would suggest that it is secured on your parents’ home.

    (This was as I expected, and I lost interest at this point, but I continued the conversation to see where it would go.)

    Me: Ah, and what would the terms of the loan be?

    BM: 14% over base (would have been a total interest of c. 23% at the time) and review at two years.

    Me: Why so high?

    BM: Ah, that’s the risk premium!

    Me: But if the loan is secured on my parents’ home, then you have no risk!

    BM: Oh…

    Now let’s look at this little exchange. 100,000 GBP borrowed at 23% over two years gives a total compounded debt to 151,290 GBP (The value of the collateral aka my parent’s home.) The bank had my analysis figures and it would have been easy to deduce from these that this proposal had not a chance in hell of surviving this rate of interest under any foreseeable conditions.

    So the process would have been:

    1) I take out the loan.

    2) The business accrues dent to the tune of 151,290 over two years.

    3) The bank reviews me at the end of year two and folds me up like a deck chair.

    4) They then seize may parents’ home and realise its 150,000 value.

    The outcomes would have been:

    1) As a customer of theirs for 15 years (all my adult life) I would have been financially destroyed.

    2) My parents, in their seventies and customers of the bank for over fifty years, would have been left homeless.

    3) The bank would have made approximately 31,000 GBP more profit than if they had lent the money out as a standard mortgage.

    The very ‘slickness’ of the approach made it clear to me that this was by no means the first time that this particular poisoned chalice had been proffered by my ‘friendly’ bank to their trusting customers. I shudder to think how many had actually taken a swig. Remember, I had atypical skills and could immediately see the trap. I reiterate – In my experience, they are not your mates, and they and their ‘advice’ on ‘good deals’ are not to be trusted!

  71. JimmyJones

    Thanks Elizabeth.

    Rob, your final sentence sounds reasonable. Interest rate swaps (IRS) used as a speculative investment (un-hedged) have risks and there will be winners and losers. It would be wrong to blame the bank or whoever for every such loss by saying that they were miss-sold. How would you distinguish mis-selling from mis-buying. You say that “reports in the UK indicate that bank mis-selling of these instruments has been widespread”, but to me, that isn’t evidence of mis-selling, it just tells me that some people hate banks.
    So far in NZ, there seems to be no evidence of any adverse affects of IRSs on our Councils. Because they are the hedged type, I don’t see how there would be any risk (from what I can tell from wikipedia). In the case of the DCC there would be no big upside or downside risk for either the DCC or the Bank. The bank takes an agreed percentage, and everybody’s happy. This is a big help to council staff wanting to build the new harbour bridge or whatever, because they can provide estimates to councillors with a known, fixed interest cost.

  72. Rob Hamlin

    Hi Jimmy,

    Mis-selling occurs when one party is more knowledgeable than the buyer and uses this knowledge, and maybe a mis-placed trust, to effect a sale that is to their advantage. In most cases where this occurs, the seller is a ‘pro’ and the buyer is an ‘amateur’. If you think about it all deceit involves a level of asymmetry in knowledge, otherwise it would not be possible to do it.

    I suppose it would be possible to argue that most of the NZ finance company customers that got burnt when they went under could be described as ‘mis-buyers’. However, they also went down due to asymmetry of knowledge and also a poor assumption along the lines that any organisation that was allowed to continually advertise their services on national TV using various rugby and news reader celebrities (legends), and managed on the boards by other political and business ‘legends’ (some of the knightly variety) must have had the rule carefully passed over them and their products by the authorities (wrong).

    A good local example of this use of asymmetrical knowledge and trust is the ringing term used by many now departed finance companies: ‘First ranking secured debenture stock’ – remember that?

    Sounds most imposing to a punter. However, let me provide a translation:

    ‘First ranking’ – There was only one rank

    ‘Secured’ – On the borrower bogan’s bodgy car in south Auckland (good luck to you in realizing that!)

    ‘Debenture stock’ – Otherwise unsecured debt that you are forwarding the finance company.

    The finance companies were an example of the repackaging and mis-selling of risk profiles (Like sub-prime collaterilised debt instruments, credit default swaps and interest rate swaps). The finance companies took money off the punters at rates barely above risk free, and then lent hem out at high rates of interest to risky borrowers. They then took the ‘spread’, the difference between the two rates as year to year profit. This worked OK for them when things were booming. It was still OK when they weren’t. Once things went sour, that was fine by them. The limited liability company went toes up, the management and shareholders made off to greener pastures and left the now defunct company’s ‘first ranking secured debenture stock’ holders with the outcome of the actually very high risk position that the company had taken.

    I repeat, a straight interest rate swap is not mis-sellable. You have to convince the ’punter’ that you are getting something for nothing to achieve that, and that requires a level of complexity. You cannot buck risk in big time borrowing and lending. If you are borrowing and it’s cheaper (initially), then it’s riskier. If it is not, then it offers an arbitrage profit opportunity, and it is very unlikely that any professional lender will knowingly hand that over to a customer. If they did, then they would not be in business for long!

    The DCC has issued no bonds or notes for over two years, and this means a couple of hundred million dollars worth of debt has been financed in some other way. Somebody has convinced them that they can borrow the money more cheaply via some other route. The recent and mounting losses on interest rate swaps strongly suggest what that route is.

    It is unlikely that the DCC have bought a straight swap. They will have bought a more or less complex debt ‘product’ that involves perhaps multiple interest rate and currency swap positions. I do not know what these are, but I do know that if they were initially cheaper than the bonds and notes that they have replaced, then they will be riskier.

  73. JimmyJones

    Rob, it is very likely that Dunedin City Treasury (DCTL or DCT) has bought straight swaps. Their goal is to provide medium/long term fixed rate loans to their customers. At present (30/6/12) they have $160 million of (disclosed) floating rate debt; some or most of this will be hedged with IRSs to provide the effect of fixed rate debt. Their goal is not to try to “beat the market” or do a deal to achieve a lower interest rate at the cost of more risk, merely to change a floating rate loan into a fixed rate loan. The bank in return for this service receives a fixed agreed payment. I don’t know the details of how IRSs work, but the only risk for the DCC seems to be that they could pay too much to achieve their goal. I would expect them to shop-around and choose the best deal. The annual report contains insufficient detail on their hedging. If their hedging is exposing us to risk, then they are doing it wrong and they are required to specify the risk as a contingent liability in the annual report. The annual report (page 25) shows a contingent liability of $4 million for something else. I do however, have a low level of trust in these reports and their auditor.
    The IRS losses shown in the accounts of DVL, DCHL and DCC are not real; they are an artefact of a defect in our NZIFRS accounting standard and represent no actual extra cost to ratepayers or any increase in debt (as far as I can tell). There are more serious things to be concerned about in the annual reports.

  74. Robert Hamlin

    I’m not sure Jimmy. Neither you nor I know what they have signed up to, and I don’t think we will be finding out anytime soon. I think that it is very unlikely to be a straight swap. The actual swapping is usually done by and between the financial institutions and the result is a loan ‘product’ for sale to punters both large and small.

    A straight fixed/floating rate swap between a borrower and a bank is another quite distinct loan product that has a widely recognised name. It’s called a FIXED RATE LOAN/MORTGAGE, and as the banks take all the risk in that particular interest rate swap situation, they are expensive for the borrower – as are the equivalent bonds that the DCC have stopped issuing.

    As to not going for the cheapest up front headline cost debt possible, remember that the DCC were under real pressure with regards to the ‘We CAN afford the Stadium!!!!!!!!!!!!!!!” claim a couple of years back. This claim was made and backed by some very influential people – pressure – and some very creative financial stuff was done to make this seem true.

    This included the absurd claim that DCHL could pay more dividends than its profits for a generation (they actually lasted barely a year in that situation). A child could see that this assertion could not be sustained – even though it formed a key underpinning of the Stadium affordability argument. These whoppers came from the very areas that you think can handle financial forecasting and risk responsibly.

    Given this I think that the purchase of a Warehouse style ‘really cheap to buy but falls to bits in six months’ pseudo-fixed-rate financial product to (initially) massage the Stadium affordability figures is quite plausible. Since then – Who knows?

  75. Calvin Oaten

    Rob and Jimmy, Brilliant!!!!! So now we know? The short answer is that there are probably (at best) about two people who know what is going on. But as you Rob, point out the stadium was never going to be able to be foisted onto the gullible mayor and council of the time without some very dodgy manipulations of the financial model. It worked, the stadium got built, and now we are starting to see the frantic attempts to keep all the financial ‘balls in the air’. Witness Dave Cull’s response to my letter wherein he tries to draw the analogy of a ‘bog standard’ fixed interest house mortgage with the multi-term tranches of debt that the DCC/DCHL operate with. Each and every one of these financial packages come with their own terms and conditions. Each and every one are relatively short term and thus require renegotiation for renewal. They are never paid off. So, as Rob says, there are a multitude of options/possibilities to be hoodwinked by the lenders. Again, as Rob says, in reality the lender (banks) always set the terms (call the shots) and always win. The only risk they take is one of the borrower defaulting. But the collateral they insist on usually covers that. In our situation the banks are secured by the borrower’s statutory right to strike rates. In a word, for the banks it’s a case of ‘heads you lose tails we win’.

  76. JimmyJones

    I agree with your points, Rob. DCHL should be a serious concern because not only has it had to borrow every cent of its stadium subsidy (this year- $8.1 million – not counting indirect subsidies), and its dividend for the last 5 years, but during that time it has spent so much on buying new things that it hasn’t been able to pay for that either. It’s just as well they own a bank that does what it’s told. Even without the burden of stadium subsidies and dividend payments to the DCC, DCHL can not survive on its present course.

    It is fun to watch Dave Cull when there are claims that DCHL borrows to pay its dividend: he goes like the possessed girl in The Exorcist just before her head spins round. It’s as if he really believes what he is saying. Syd and Thomson are always by his side to give him support and wipe away the frothing. All three of them know that a new bunch of musicians on the Titanic won’t stop it sinking. No doubt some of them see the impending demise of DCHL as an excuse to push some otherwise undesirable solution on to us.

    Calvin. I have no doubt that the planning for the stadium has always seen DCHL as a magic money-box, where increases in debt every year are used to provide annual funding for the stadium’s losses. I suspect that the DCC is prevented by law from doing this sort of thing, but DCHL is a CCTO and isn’t restricted. Councillors with common sense could fix this, but they haven’t. All the councillors have been aware of this for over two years now and have done nothing. They need to learn that they are responsible, and that they cannot pretend that Dave Cull and the staff can be trusted to do what’s right for Dunedin. Show some courage.

  77. Hype O'Thermia

    In law is ANYONE able to be held responsible for this?

  78. Robert Hamlin

    No, unless deceit happened, and can be proven in a court, and for that you have to have a motivated complainant who has access to the necessary evidence. I think you’re not likely to get that short of a complete clean-out of the relevant mayors, councillors, directors and executives as any such complainant would have to be one or more of them (positions not people).

    Other than that stupidity is not a crime, even if it involves other people’s money. Recklessness is now invariably described as ‘poor decision making in light of the market and economic conditions of the time’ and corruption is usually a verbal process (no traces). Those who practice the latter are now also learning not to use e-mail.

  79. JimmyJones

    Rob, I guess you’re right, but I suggest vigilance in case there is an opportunity. “Stupidity is not a crime” – I guess we can only hope that the next election gives us smarter councillors, not dumber. There is no guarantee.

    Earlier I said “The warnings from Standard & Poors are read and not understood by the councillors, but the staff do”. What I meant was: the credit reports are » not « read and not understood by the councillors.

    All councillors, including Lee Vandervis, need to read all reports presented to them (and a few others) to do their job properly. “Not enough time” is a feeble excuse, because you councillors get to decide how close to a meeting that you receive reports.

    Staff will give you people reports late, use unintelligible language, make things up, create fake financial forecasts and try any trick that will work to ensure that they get what they want. And they do these things because they know how feckless and lazy you all are. It seems to me that councillors need independent advice, because the staff can’t be trusted; and Dunedin’s renters and ratepayers need representatives much more capable and willing to put the interest of the city first.

  80. amanda

    Councillors will only show courage if they think that continued silence will result in being kicked off council at next year’s election. If they believe that revealing Dunedin’s fiscal house of cards will win them votes, they will all do it; though admittedly tricky for Hudson’s band of brothers since they are the ones responsible for the stadium con in the first place. Since Dunedin people re-elected seven of the stadium councillors at the last election, the majority on council. This signalled to ALL councillors that Dunedin people do not hold incompetent (or worse) councillors to account, so no accountability for ineptitude for Hudson and mates. Not surprisingly Dunedin people have a council that continues its lack of transparency. All we can hope is that Dunedin people send a message that incompetent councillors are held to account at next year’s election. This is hard given that the media is not keen to remind voters who is responsible for the stadium con; it appears that the stadium just appeared out of thin air with no-one around the council table willing to remind anyone of how they pushed for the stadium. For what it is worth, I’m looking at you Crs Hudson, Noone, Weatherall, Bezett, Acklin, Collins and Brown!

  81. Gidday Folks. I have just looked back at the Blog over the last three weeks and “it is dying” … right? All heat no light? This happens so often in similar cases that it gave me “pause for thought”. Here are some reasons that, in spite of intelligent input asking key questions on substantial issues … in the end … Phutt! Nothing achieved.

    Here is, IMHO, why … and I make no apologies for not pulling the punches;

    1. You have no governance input to Council that works! You rely on a blog/media/coffee table chat to convey the message. While there remains no effective and formally approved means of tabling these concerns in front of the Council you will be treated with “reserve”, I was tempted to call it disdain. Suggestion: Get the Michael Laws/Whanganui DC referenda process going and link it to a ratepayers forum process within the DCC (get the budget for it too!)

    2. The OAG/Ombudsman complaints process is moribund … or just plain useless. Suggestion: Lobby your Crs and MP’s to get this fixed.

    3. Get the right Council in 2013 (exactly 12 months off!) including those with some financial managment skills/background. You are sure going to need these skills (now/soon). Some of the current Council deserve re-election on this basis? Suggestion: At election campaign time get candidates to committ to the above process and push for a budget to get it achieved.

    4. Push for contestable competent independent advice (and a budget for it controlled by the Council!). … “But then I would say that!”

    • Elizabeth

      Larry, mate. The blog is a blog not an orchestrated political movement. Some of the people who contribute here are actively involved in change and formal processes they simply can’t and don’t need to report here.
      Views remain high – steadily increasing as they’ve done without fail since the blog began in 2007, started by Paul for discussion of stadium design matters. Since then Paul and I have been happy to allow the blog to develop organically, and so it does.
      The time everybody puts in is voluntary, including ours – we’re not funded and actively avoid any dependence on commercial advertising.
      We’re fully independent and very keen to stay that way. No money changes hands. If we turn into something else, money would be necessary… that’s an economy we’d rather the blog stayed out of, we prefer our day jobs for that interface.
      If people want change in local government this blog has never been about directing it, or making that change happen, that’s not our intention. By default – and arrangement – we tend to provide a forum that ODT does not. People contribute their views freely and willingly at the same time they use a variety of blogs and other media.
      What if? Dunedin isn’t a sleepy hollow. It’s something of a learning environment. That may disappoint some people, but it’s not depressing too many given the view numbers. Meanwhile, other stuff is processing.

      I don’t disagree with your suggestions for political change and ensuring better financial management at DCC. But neither is it the role of What if? Dunedin to bring about anything that looks like Michael Laws/W(h)anganui. Went to school with his sister… Nope, not going down the path of righteousness with Michael Laws as shining example. That he organised the heavo-ho at W(h)anganui isn’t princely in the context of who he is in real life.

      • Fair enough Elizabeth. Lets see what others feel viz … the social and actual usefulness (or not) of a blog such as this one. BTW this! blog is very different to many others … notable for its intelligent debate. Surely! this alone warrants some effective results arising from its dialogue. Other wise talk is cheap … hot air just goes “poof” … Plan B: Hire a Hall/Stand in 2013.
        The Laws initiative should not be judged by its name/Sponsor I agree. Just results. “It worked”.

        • Elizabeth

          Hi Larry – blogs don’t change the world. Use of the interwebs can assist, and does so in Dunedin. Those contributing and reading here are present actively ‘about town’. This blog is viewed by people that can make decisions for change – we know that, we’re monitored to hell, we like that. Our listening audience is pretty interesting!

          Aside, people are manoeuvring for the elections in October 2013. The good old boys have already decided Cull needs to be replaced as mayor. Factions are becoming apparent.

  82. amanda

    “Get the right council in 2013”. On the money. If financial management skills are important then that means the stadium councillors are non starters since they are responsible for the city’s unsustainable debt. Though the media is not keen to remind voters of who is responsible for the stadium con, as I said above. An excellent idea to lobby Crs and MPs to fix the OAG complaints progress, that will ferret out those who care about democractic due process and those who like the freedom a week complaints processs provides for their own agendas.

  83. Hype O'Thermia

    I see this as a place to learn facts, hear opinions and discuss where responsibility lies for the myriad ballsups. Political activity is something else we do – separately from contributing to this – or don’t, it’s not compulsory. Some of us here share 100% one another’s opinions including the best ways to be active, and some of us do it in various ways.
    The real value of this blog IS that it’s “just” talk. We don’t have to sign up to anything, donate to a political cause, endorse any particular candidate(s). We go out into our off-blog lives better informed than those who stick to mainstream media to learn about what’s going on in our city, we have more to offer in conversation with others who aren’t regular readers, we have the bullets ready to fire when there is a public meeting because someone here has come up with more facts and figures, someone here has joined the dots.

  84. Elizabeth

    {Comment moved here, relevance. Newspaper scan supplied -Eds}

    Calvin Oaten
    Submitted on 2012/11/30 at 11:24 am

    Some may have read the letter from ‘Dennis Dorney’ quoting me regarding the DCC being involved in ‘Interest Rate Swaps’ (IRS) as a safeguard against rising debt servicing costs. Athol Stephens’ lengthy explanations take some digesting for the average ‘punter’. For what it is worth, I copy my original letter which Dave Cull parroted a reply deriding its contents including me. Also my follow up which the ODT in its infinite wisdom refused to print.

    The recent publishing of the DCC’s Annual Report together with that of DCHL’s Group, shows the general position is one of heavy debt amounting to a disclosed consolidated sum of $616 million. Of this, it would appear that the DCC’s core debt stands at $216m plus DVL’s Stadium debt at $146.6m to total $362.6m. However, of more significance perhaps is a factor which came to light in the annual report of DVL, which seems not to have been considered by council in any depth at all. As part of its loss it was disclosed that there was an amount of ($8.579m) attributable to ‘Interest Rate Swap’ (IRS) losses. This is a staggering admission, as I don’t believe DVL has anywhere in its brief, authority to dabble in this high risk activity. Worse, this activity shows up in the DCC Report which Mayor Dave Cull endorsed and signed off. On page 146 is the heading: ‘Cash Flow Hedge Reserves’, and this shows brought forward losses of ($17.906m) added to by this year’s ($6.698m) to total ($24.604m). The Consolidated Group shows (presumably DVL’s loss) plus DCC’s to total ($34.388m). Even worse still, if we go to page 179 we see that there is a Derivative Liability (at risk) of $24.9m.

    Now it is well documented just how risky these activities are with examples around the world to reflect upon. Just ‘Wikipedia’ the Hammersmith Fulham case (a borough of greater London) to see how fraught these ‘gambles’ (no other word for it) can be. These losses here seem to indicate that much greater amounts than the actual debts are being wagered in this manner, suggesting that the city could be in very dire straits if the tide went against our wagerer. We are obviously on a loss streak now with $34.388m already lost.

    Can this be stopped or are we, like a compulsive gambler, hooked ?

    I would ask Mayor Cull to please explain just what is going on, and more importantly, on what authority are these high risk activities carried out? Can he assure the citizens that this risk is sustainable and how does he explain the loss to date of the $34.388m? More important, will he put a stop to these activities?

    MAYOR DAVE CULL, in his response to my letter of 15/11/12 states, “Mr Oaten obviously doesn’t understand the financial mechanism or its effects.”

    Probably true. But does he mean by this, that because it is claimed that the consolidated Interest Rate Swaps (IRS) losses of ($34.388m) on page 146 of the DCC Annual Report are not really losses but are only mentioned to comply with NZIFRS rules? The accounting rules were changed in order that an organisation’s true long term liabilities should be accurately reflected in their balance sheet.

    He goes on to say that “these losses are not cash losses, and there is no risk or unpredicted cost to ratepayers.” I know that a loss/profit, is not a loss/profit, until it is taken. By this, I suspect that when the loan in question matures and is to be repaid, then those additional losses will will come to charge. If not, then the loan would have been a straight ‘fixed interest loan’ with no IRS facility employed at all. It is the ‘swap’ side of the deal which gives the option of winning or losing on the interest rates during the term of the loan, in effect a gamble. And we all know that banks operate on the basis of ‘heads we win, tails you lose’.

    Put simply, if the total Consolidated Group Borrowings shown as $682.362m (page 64 DCHL Accounts) was to have all matured at the 30 June 2012 then in addition to the interest paid during the course of the term, the (34.388m) loss would be charged.

    That is the interest component of the debt, but could Dave Cull categorically deny that there is not also a currency exchange rate risk in these arrangements.

    ODT 30-11-12 Letter to the editor Dennis Dorney (2)
    ODT Fri, 30 Nov 2012 (page 6)

  85. Hype O'Thermia

    Calvin, Dave Cull could certainly deny it. Here, refresh your memory of Alice in Wonderland:

    Alice laughed. ‘There’s no use trying,’ she said, ‘one can’t believe impossible things.’
    ‘I daresay you haven’t had much practice,’ said the Queen. ‘When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.’

  86. Something that is becoming clear is that the losses from the interest rate swaps have largely been taken in last year’s accounts. This bad news has been got out of the way, along with the Delta losses. Without both these losses, next year’s accounts are going to show a substantial improvement, and Dave Cull will claim credit for turning around the Council’s finances.

  87. Anonymous

    Makes you then wonder why the upper management covering for Dave Cull are covering for Dave Cull. Have they recognised that this smiling buffoon enables them to keep on with the devious business at hand and diverting accountability away from their Stakeholder masters?

  88. Mike

    Rolling Stone’s Matt Taibbi has another article on price fixing and corruption in the interest rate swap markets
    http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425#ixzz2RaI1ZILu

    • Thanks Mike, it’s a must read.
      Food for thought as to why Stephens left DCC so suddenly – severe council exposure to risk on the derivatives market ?
      What does $700m of consolidated council debt look like as risk….

  89. Mike, this is the most revealing thing I have read in a long time. As an economic ‘luddite,’ I have only ever gotten any grip on these things by just reading, listening, evaluating, and listening to my inner man. When he repeats the old adage that ‘if it seems too good to be true then it probably is,’ then beware. If that is established, then one simply looks and listens to the people involved, evaluates their abilities, their professional skills (or lack of), their public utterings, and last but not least, their obvious ethics. Logic kicks in, and the conclusion is that we citizens have been led like Hamlin’s (apologies to Rob) rats to the tune of ‘whistling dixie’ by the incompetents, scallywags, malingerers and crooks, to a very awkward place. I am in a very pessimistic place and I don’t like what I see.

  90. Rob Hamlin

    I do suspect that, with the fiscal warrior’s departure, a major layer of protection has been stripped off these arrangements, and that the realisation that here is a situation that cannot be handled or contained in an orderly manner is slowly percolating out of the one-man office that is DCTL. It will take a while to break surface in the public domain unless something major happens or is revealed. I suspect that strenuous efforts will be made in some quarters to make sure that this is well after this year’s elections. However, Alistair is incorrect in one area – The DCC and DCTL are no longer in control of this situation – The accounts suggest that their debt is now pretty much fully rolled into these instruments. Control, such as it is, now lies somewhere ‘out there’ at the other end of these instruments, and these outside interests will now dictate the pace and nature of events

  91. Anonymous

    Likewise the illustration on a related story by the same reporter may represent a different location but is a perfect reflection of the fat neck corporate bastards tearing apart Dunedin city, including the Stakeholders of Queenstown, their servants in public office, chief executive officers that keep them in pocket and a supportive media some readers still believe writes articles that reflect the position of the wider community.

    The public companies of Dunedin City Council are sitting quietly in the corner, hoping the ODT and Dave Cull will continue to distract, that nobody else is looking at them – but they can keep on hoping. The city is in serious financial strife, but their time’s just about up too.

    Laying off more staff while lining their own pockets isn’t going to cover up the corruption for much longer.

    http://www.rollingstone.com/politics/news/bank-of-america-too-crooked-to-fail-20120314

  92. Russell Garbutt

    One of my colleagues at work who I can describe as a deep thinking sort of guy has been paying a lot of attention to the world economic state and as a result he has been dabbling in this mysterious bitcoin system whereby wealth can be mined and traded. What he was saying the other day was that no-one can really figure out why gold and silver has plummeted to unprecedented levels and the belief is that it is being manipulated by groups whose power is much greater than that of sovereign states.

    An intriguing article on this subject is here:

    http://moneymorning.com/2012/04/06/the-who-how-and-why-behind-silver-price-manipulation/

    What this does show is that these large “commercials” are really the enemy within – it was them that got bailed out by the US Government, and the Federal Reserve is still printing money faster than ever before to continue to finance their avarice and greed.

    In the middle of all of this are these financial slot machines called interest rate swap derivatives – a dark, dark world populated by large greedy “commercials” and stupid gamblers – mostly posing as Local Government Finance Officers. The actual stupid individuals that convince themselves and their equally stupid governance people to dabble in this gambling are, unfortunately, not those that bear the cost. It is us, dear fellow ratepayers, and from information recently to hand whereby the DCC consolidated debt is near to $700 million with an interest rate payable of 7% it means that the true position is being effectively withheld from public view. Just remember every $1 million shortfall by the DCC is a 1% rise in rates.

    The most troubling thing of all is that all of this financial gobbledygook is so mysterious that most people simply don’t comprehend what is being talked about and so they ASSUME that those in control know about it. Can you imagine Neil Collins or Bill Acklin trying to explain just exactly what interest rate swap derivatives are all about and how a current exposure of close on $30 million to the DCC is something not to worry about? Those two and I suggest nearly all of the rest, wouldn’t have a clue. Test it out. Give some of them a ring, or send them an email, and ask them to explain the whole thing and how it affects the DCC. Bet you don’t get many responses.

    The truth is that MOST of the Councillors didn’t understand that upfront seat sales for the stadium weren’t private construction funding until PWC told them the obvious truth. Also a truth is that many Councillors who should have understood that really simple financial fact didn’t understand when told beforehand by ratepayers. What hope for ANY understanding therefore of deep, dark, financial gambling in the swap markets?

    What the DCC and many similar bodies rely on is the opaqueness of what they are actually up to, and a compliant main-stream press. This Council has both.

  93. Elizabeth, thanks for putting up that post. Kaipara, I am afraid is just the tip of the iceberg. And as Rob implies, we here in Dunedin are no better placed. The frightening thing is the real risk that the government could unwittingly, or knowingly, throw us all at the mercy of the banks. Woe betide the day that happens because they have been shown through history to be totally without ethics or conscience. We only have to look around the world as it is at present to know that. Meanwhile the people in whom we trusted in the Town Hall are busy preening themselves over their achievements in creating the debt mountain we have. A curse upon all their houses.

  94. ### marketoracle.co.uk Sep 23, 2013 – 12:54 PM GMT
    How Interest Rate Swaps Are Crushing America’s Cities
    By Money_Morning
    Garrett Baldwin writes: It’s something you may not even have heard of, but the massive financial burden of interest rate swaps is pressuring city budgets and pinching taxpayers more every year.

    But before I tell you what interest rate swaps are, let me show you how they’ve affected life in America’s largest city – New York.
    Last week, I drove through the Lincoln Tunnel. The cash fare to travel the 1.5 miles from New Jersey into Manhattan was a whopping $13 – more than 50% more than the last time I was there.
    When I jumped on the subway a few hours later, a one-way fare was $2.50, more than 60% more than when I lived in the city in 2008. And my water at the hotel? Shut off in the morning because the water authority was struggling to handle maintenance requests due to being short-handed.
    These increases are not the result of the expansion of the transit system or increases in union salaries (common misconceptions).
    Ultimately, the explosion in costs and slashing of budgets in New York and many other U.S. cities in recent years are happening because of a little-known type of financial contract – known as an interest rate swap.
    Read more

  95. Rob Hamlin warned about this months ago. Athol Stephens has put the DCC at serious risk with just this type of gambling. If we look at last year’s DCC Annual Report we can see it is laced with IRS (interest rate swaps) and derivatives, another type of financial chicanery. We could go down the “swannee” as quick as a flash if they “turkey up”.

  96. John P.Evans, council nominee

    If a bank, any bank tries to sell you a Product, any Product, run like hell, see foreign currency loans, fixed interest (float) floating interest (fix), do the opposite and win, when they are not selling foreign currency loans, get one!

    When a bank offers you a credit card, pay off all your cards and burn them.

    Right now try to fix for ten years (madam the product is unavailable!)

    The DCC would try to sell you a DCC bond if they thought they could convince you of the strong asset base sufficient to borrow $650,000,000.

    The problem is most of the supposed assets are actual liabilities and therefore have negative value – see Stadium.

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