OAKLAND, Calif. Nov. 13, 2012 - According to a new report from researchers at UC Berkeley, the University of California has already lost more than $57 million dollars from risky investments in Wall Street derivatives called "Interest Rate Swaps." And without action to renegotiate its swap agreements, the UC's losses could top $200 million.
"In researching UC debt financing, we found a culture of gambling that leaves students, faculty, workers and taxpayers on the hook to cover the losses," said UC Berkeley Doctoral Student Charlie Eaton, who co-authored the report. "Last week's passage of Prop. 30 prevented $250 million in UC budget cuts this year, but if no action is taken to renegotiate the UC's risky bets, those savings could be almost entirely wiped out in a matter of years."
Swapping Our Future details how UC Regents with close ties to Wall Street investment banks used side bets, called "interest rate swaps," to hedge against rising interest rates on some of UC's $13.7 billion in new borrowing that was largely spent on medical centers and new facilities for non-California students. Because interest rates have stayed low following the financial collapse of 2008, in part due to illegal manipulation by many of the same banks that sold the swaps, the UC is now losing ten million dollars per year.
Unlike other public institutions that were sold the same financial derivatives, UC Executives have failed to renegotiate their swaps with Wall Street.
"While many other public institutions that were sold swaps have sought legal remedies to recoup their losses or renegotiation of these agreements, it is troubling to see that the UC has not taken such actions," said State Senator Leland Yee. "This effectively puts Wall Street profits ahead of California students---and that is simply unacceptable."
Swapping Our Future includes a set of recommendations to help stem the University of California's Interest Rate Swap losses and improve its financial transparency, including:
Renegotiation of existing swap agreements;
Legal recourse against the banks that illegally manipulated interest rates while selling these products;
Appointing a committee of delegates from key UC Communities (students, faculty, workers and parents) to conduct a comprehensive review of UC borrowing practices, to ensure any future actions are both transparent and accountable to all UC stakeholders.
"We need to respond to this new new data in a thorough and thoughtful way," said Assemblyman-Elect Phil Ting. "Our financial strategies need to be geared to protect taxpayers, students, parents and all Californians, not simply to maximize profits for Wall Street investors."
Students and UC workers have faced the brunt of cuts at the UC over the past decade—a tripling of in-state tuition, cuts to new enrollment of California students, reductions in new faculty hires, and cuts to academic services and campus maintenance. Regents will vote on another fee increase for professional degree programs this week.
"We don't need more tuition and fee increases" said UC Student Association President Raquel Morales. "We need good fiscal management to make financial decisions that are beneficial to all of the communities in the University, including students. The troubling data in this report suggests that we're not getting it."
According to the report, the UC's investment in complex financial derivatives was one of several dramatic shifts in its financial management over the past two decades. Another has been the growing foothold of former Wall Street Executives within top UC Management positions—including veterans of the same companies, like now defunct Lehman Brothers, that sold the UC its interest rate swaps.
"Instead of proposing more cuts or fee increases that undermine its academic mission, the UC must take steps to improve transparency and prevent even the appearance of conflicts of interest within its leadership," added Christine Rosen, a Professor at UC Berkeley's Haas School of Business. "Responsible financial management is the Regents moral obligation to everyone for whom the UC is the gateway to opportunity, and the state for whom the UC is an engine of innovation and economic growth."
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