Corzine and New Jersey paying Goldman Sachs $1 million monthly with no returns

Senator Joe Kyrillos reacted with fury and disgust to a Bloomberg News article that says the Corzine administration is paying Goldman Sachs almost $1 million a month because the state recklessly entered a risky financial agreement. The agreement, according to Bloomberg, performed so badly it provides no benefits for taxpayers and never will. Kyrillos demanded that Governor Corzine order an immediate, independent accounting of the more than $4.4 billion of similar transactions that the state and state authorities have entered over the last eight years.

According to Bloomberg, the state has already spent $11.4 million from the state’s nearly bankrupt Transportation Trust Fund to pay what amounts to double interest on a $345 million debt. In the end, the state may pay one of the biggest banks on Wall Street tens of millions of dollars more for doing absolutely nothing for New Jersey taxpayers besides taking their money.

  “The governor has said he is open to hiking the gas tax to raise money to pay for vital transportation projects,” Senator Kyrillos said. “No gas tax should be on the table until we find out if we can get our highway and mass transit money back from this failed transaction.”

Governor Corzine, who became the head of Goldman Sachs after working there for decades, asked if he knew about the costly failure of the Goldman deal, is quoted by Bloomberg as saying:

“I’m sure there’s an explanation,” Corzine, 62, said during a brief interview as he left a contractors’ convention in New Brunswick, New Jersey, on Oct. 14. “They don’t just send money out.”

            Kyrillos said he found the governor’s reply astonishing.

“Governor Corzine, one of the nation’s best known Wall Street financiers, claims he is so ignorant of New Jersey’s borrowing practices that he doesn’t know that taxpayers are paying millions of dollars in fees and receiving zero benefits in return,” Kyrillos said. “If we take him at his word, then it is vital that he order an immediate, independent accounting of the handling of the billions of dollars of similar transactions that this state has entered into over the last eight years, so he can learn with the rest of us what is being done with taxpayer money.”

      Kyrillos called on the governor to immediately order a truly independent accounting – perhaps even request that it be overseen by the U.S. attorney — of New Jersey’s use of auction rate securities and interest rate swaps.

According to Bloomberg, New Jersey has 28 remaining contracts like the transportation agreement on a whopping $4.4 billion worth of debt. In addition the state has paid tens of millions of dollars over the past eight years to get out of unfavorable agreements – all with no accurate accounting of whether the state got anywhere near the promised benefits or of the costs that taxpayers will pay because of the pacts.

            “This debacle may have begun under past governors, but it is only the Corzine administration that is now trying to keep the costs and problems a secret from the public,” Senator Kyrillos said.

            “It’s time for an independent accounting of the public finance operations of New Jersey state government,” Senator Kyrillos said. “The taxpayers deserve to know what price they are paying for years of reckless borrowing and risky financial transactions.”

            The Bloomberg article is below. Highlights were done by the Republican Senate office:

New Jersey Pays Goldman Sachs for Swaps on Nonexistent Bonds

By Dunstan McNichol

     Oct. 23 (Bloomberg) — New Jersey taxpayers are sending

almost $1 million a month to a partnership run by Goldman Sachs

Group Inc. for protection against rising interest costs on bonds

that the state redeemed more than a year ago.

     The most-densely populated U.S. state is making the

payments under an agreement made during the administration of

former Governor James E. McGreevey in 2003, when New Jersey’s

Transportation Trust Fund Authority sold $345 million in

auction-rate bonds whose yields fluctuated with short-term

interest costs. The agency finances road and rail projects.

     “This vividly shows the risk of entering into interest-

rate swap agreements,” said Christopher Taylor, former

executive director of the Municipal Securities Rulemaking Board

in Alexandria, Virginia. “The world’s got to see what stupidity

even the sophisticated investors like the transportation fund

can get into.”

     While New Jersey replaced the debt with fixed-rate

securities in 2008 after the $330 billion auction-rate bond

market froze, the swap, in which two parties typically exchange

fixed payments for ones based on floating interest rates, isn’t

scheduled to expire until 2019.

     The state paid $940,000 under the agreement last month and

a total of $11.4 million since the auction-rate bonds were

redeemed. The expenditures come as the fund reaches its

borrowing limit and Governor Jon Corzine, Goldman’s former

chairman who was a U.S. senator when the contract was signed,

seeks $400 million in budget reductions as tax receipts fall.

                        Harvard Swaps

     Municipalities and universities across the U.S. have paid

hundreds of millions to terminate swaps on variable-rate debt

after interest costs, instead of climbing, fell to record lows

in the worst credit crisis since the Great Depression. Harvard

University last week disclosed it had given $497.6 million to

investment banks to exit such agreements following similar

terminations by New York’s Metropolitan Transportation Authority

and the Oakland, California-based Bay Area Toll Authority.

     In New Jersey, the 3.6 percent fixed rate the trust fund is

paying on the swap has pushed the cost to taxpayers of the

original $345 million borrowing to 7.8 percent, the most the

authority has paid since it was formed in 1985, according to

records posted on its Web site.

     The payments are draining money from a dwindling account

that may not be able to support new projects because the $895

million in annual gasoline taxes and toll revenue dedicated to

the fund will be needed to pay debt service on $10.3 billion in

obligations. To help prop up spending, officials have suggested

raising New Jersey’s 14.5 cents-a-gallon gasoline levy, the

fourth-lowest among U.S. states, according to research by the

Tax Foundation, a Washington, D.C.-based research organization.

                          Pulaski Skyway

     New Jersey’s contract with Goldman Sachs Mitsui Marine

Derivative Products L.P., a partnership of the bank and Japan’s

Mitsui Sumitomo Insurance Group Holdings Inc., allows the state

to terminate the deal without penalty after 2011. Canceling

before then would require a payment estimated at $37.6 million

on Sept. 30, according to state records.

     The state’s payments on the swap in the past year have

exceeded the $10 million budgeted to maintain the 76-year-old

Pulaski Skyway, the 3-mile (4.8 kilometers) elevated road from

Newark to Jersey City.

     “I’m sure there’s an explanation,” Corzine, 62, said

during a brief interview as he left a contractors’ convention in

New Brunswick, New Jersey, on Oct. 14. “They don’t just send

money out.”

     The governor declined further comment on the transaction

according to his spokesman, Steve Sigmund.

                      ‘Aggressively Manage’

     “We believe Treasury should continue to aggressively

manage the termination, conversion and management of swaps that

this administration inherited, while dealing with the realities

of the most difficult credit conditions in history,” Sigmund

said in an e-mail.

     Corzine, a Democrat, is the only U.S. governor seeking re-

election this year and tied in this month’s Quinnipiac poll with

Republican Christopher Christie, 47, a former federal

prosecutor. Each had about 40 percent, with a 2.8-percentage-

point margin of error.

     New Jersey couldn’t reach acceptable terms when it tried to

issue variable-rate bonds last year to replace the failed

auction-rate securities hedged by the Goldman swap, the Office

of Public Finance said in a three-page response to questions

about the transaction. It is unfair to judge the ultimate

performance of the 16-year agreement until it concludes in 2019,

the agency said in the statement.

                        ‘True Economics’

     “Cherry-picking one date in time for a net payment or net

receipt of swap payment does not accurately or objectively

reflect the true economics of the contract,” the office said in

the e-mailed statement.

     Goldman Sachs is working with the state to make adjustments

in light of “changes in market conditions that have made the

transaction less attractive,” spokesman Michael DuVally said in

an e-mail. “The economics and risks involved in this

transaction were fully understood when the authority decided to

enter into this swap six years ago.”

     Acacia Financial Group Inc., the Marlton, N.J.-based

adviser on the fixed-rate bonds that replaced the auction

securities, referred questions to the Office of Public Finance.

     “Decisions were made to proceed with the swap,” said

Vivian Altman, the trust fund’s adviser on the original debt

issue in 2003, said in a phone interview.

     “I can’t speak to what discussions they had internally,”

she said. “I would have no way of knowing. I just have no idea

of what information they had been provided.”

                      28 Swap Contracts

     New Jersey, which Moody’s Investors Service called “one of

the largest users of swaps in the municipal market,” has 28

such contracts outstanding on $4.4 billion worth of debt,

according to a monthly valuation report.

     The trust fund agreement was made three years before

Corzine became governor. Auction-rate obligations involved in

the transaction were supposed to allow borrowers to realize

short-term interest rates on long-term debt by offering the

bonds for periodic resale. The market froze after banks that

historically volunteered to buy unwanted securities stopped

doing so during the global credit crisis.

     Kevin Willens, a managing director of Goldman and currently

a director of the MSRB, which sets standards for banks and

securities firms in the $2.8 trillion market, presented the

swaps proposal on the bank’s behalf, authority minutes show.

     Charts “described the success rates of swaps,” according

to the minutes. Willens was not an MSRB director at the time.

                          $9.9 Million

     New Jersey saved $9.9 million from 2003 to 2008 by issuing

the auction-rate bonds instead of fixed-cost debt, the Office of

Public Finance said in a report last year.

     The trust fund paid $4.5 million in penalty interest

payments when the auction-rate market collapsed and some

borrowers’ costs soared. After it failed to put together a sale

of a different type of variable-rate bonds, New Jersey then

reissued 11-year notes yielding 4.18 percent in August 2008,

according to the Office of Public Finance.

     Refinancing the bonds cost $2.1 million, reducing the

authority’s savings on the transaction to $3.3 million, state

records show.

     Since then, the fund has paid almost four times that amount

on a contract that hedges nothing.

     For New Jersey, the swap became “a tool for no purpose,”

former regulator Taylor said.