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Report critiquing UC money management under fire from university officials

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NOVEMBER 14, 2012

A report written by UC Berkeley graduate students critiquing the university for poor money management is under fire from UC officials, who claim its information is misleading and inaccurate.

In the report, the graduate students say certain interest rate-swapping deals the university has made since 2003 have caused the system to lose nearly $57 million.

UC Executive Vice President and Chief Financial Officer Peter Taylor said the claims made about interest rate swaps in the report are unsubstantiated.

“If this was a finance class, they would fail,” said Taylor. “They would flunk.”

“We would have been happy to sit down and walk through our debt, but they never asked,” he said. “They never asked our perspective — they made a bunch of assumptions.”

An interest rate swap occurs when one party is not satisfied with a variable interest rate on a bond, so they talk to an external party, like a bank, in an effort to get a fixed rate. The original party then pays the external party the fixed interest rate, and, in return, the external party pays the variable rate to the bond seller, according to Taylor.

The graduate students’ report, titled “Swapping Our Future: How Students and Taxpayers Are Funding Risky UC Borrowing and Wall Street Profits” claims that the crux of the university’s debt problems is a result of poor management of certain interest rate swaps and a lack of university action to renegotiate the mismanaged swaps.

“Swaps are a bet that interest rates are going to be higher, but (after the financial crisis in 2008,) they were lowered so that credit would be cheaper,” said Charlie Eaton, a sociology graduate student at UC Berkeley and one of the report’s authors. “Now, because of our swap bets, we are losing money.”

Eaton and his colleagues focused heavily on the finances of the Ronald Reagan UCLA Medical Center, which the report claims has caused the university to lose $23 million to date as a result of interest rate swaps associated with bonds issued in 2007 to finance the seismic renovations of the center.

Since the bond does not fully mature until 2047, UC officials requested a fixed rate on the bond to protect it from fluctuations in a variable interest rate, according to Taylor.

Taylor said that the report is comparing apples and oranges because most of the bond interest rates that the UC system uses are fixed to begin with. He added that the university has only done four interest rates swaps in the past 10 years. In total, the interest rate swaps have saved UC stakeholders $46 million, according to Taylor.

“They are suggesting something more risky than what they accused us for,” Taylor said.

Terrance Odean, a professor of finance at the Haas School of Business, said it is important to analyze these types of investments by looking at the whole picture.

“You must look at (investments) like a portfolio,” he said. “You can’t go through each investment and look for the ones that are doing badly.”

The UC Board of Regents addressed the report at its meeting Wednesday. According to UC spokesperson Steve Montiel, no members of the board disagreed with Taylor’s rebuttal.

Brittany Jahn covers higher education. Contact her at [email protected].

NOVEMBER 15, 2012