How a Plan to Help Stockton, Calif., Pay Pensions Backfired

The following is an excerpt from an article in 

The New York Times
Tuesday, September 04, 2012

How a Plan to Help Stockton, Calif., Pay Pensions Backfired

By MARY WILLIAMS WALSH

Jeffrey A. Michael, a finance professor in Stockton, Calif., took a hard look at his city’s bankruptcy this summer and thought he saw a smoking gun: a dubious bond deal that bankers had pushed on Stockton just as the local economy was starting to tank in the spring of 2007, he said.

Stockton sold the bonds, about $125 million worth, to obtain cash to close a shortfall in its pension plans for current and retired city workers. The strategy backfired, which is part of the reason the city is now in Chapter 9 bankruptcy. Stockton is trying to walk away from the so-called pension obligation bonds and to renegotiate other debts.

After reviewing an analysis of the bond deal, underwritten by the ill-fated investment bank, Lehman Brothers, and watching a recording of the Stockton City Council meeting where Lehman bankers pitched the deal, Mr. Michael concluded that “Stockton is entitled to some relief, due to deceptive and misleading sales practices that understated the risk.”

“Lehman Brothers just didn’t disclose all the risks of the transaction,” he said. “Their product didn’t work, in the same way as if they had built a marina for the city and then the marina collapsed.”

Financial analysts and actuaries say essentially the same pitch that swayed Stockton has been made thousands of times to local governments all over the country — and that many of them were drawn into deals that have since cost them dearly.

Since virtually all pension obligation bonds turn on the same basic strategy that Stockton followed, Mr. Michael’s research could be a road map for avoiding more such problems, or perhaps for seeking redress. His analysis was part of his August economic forecast for the region, which he prepares as director of the Business Forecasting Center at the University of the Pacific.

There are about $64 billion in pension obligation bonds outstanding, and even though issuance has slowed, more of the bonds are coming to market, even now.

Officials in Fort Lauderdale, Fla., are scheduled to vote on a $300 million pension obligation bond on Wednesday, for instance. Hamden, Conn., has amended its charter to allow for the bonds to rescue a city pension fund that is wasting away. Oakland, Calif., recently issued about $211 million of the bonds, following the lead of several other California cities and counties.

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For Deal Makers, Incubator Offers an Alternative to Wall St.

The following is an excerpt from an article in 

The New York Times
Tuesday, August 14, 2012

For Deal Makers, Incubator Offers an Alternative to Wall St.

By ADRIANA GARDELLA

Incubators have long existed for technology start-ups. But the needs of investment bankers are not quite the same as those of tech entrepreneurs who started a business in a garage and spent all night programming code.

Jolyne Caruso, experienced on Wall Street, took a page from the tech playbook to help seasoned financiers run their own firms. In 2010, she created the Alberleen Group, an incubator for investment bankers who have experience in their sectors and entrepreneurial attitudes but lack capital, investor contacts or support in areas like regulatory compliance.

As the economy remains lackluster and Wall Street keeps shedding jobs, Ms. Caruso is offering an alternative to the large firms and the more prominent boutique investment banks.

Just as Wall Street has learned from the tech industry to be more nimble, the Alberleen Group's team members say they set themselves apart from other banks by providing more creative, customized services. In addition, the incubator has been able to attract clients who are often disenchanted with the higher fees, diminished service and potential for conflicts of interest at the big banks, she said.

"The big investment banks continue to be tough places to work - between regulations, the lack of capital to fund deals and the broken compensation model," Ms. Caruso said, adding that the "misery factor" remains high even four years after the financial crisis.

Though some Wall Street bankers have started boutique investment banks, not everyone has the investment capital or backing to do so. But because of the support of the Alberleen Group, which is affiliated with a registered broker-dealer, its banking teams can offer clients the gamut of investment banking services including bond financing, and advice on mergers and acquisitions or initial public offerings.

Ms. Caruso's connections, cultivated during 30 years on Wall Street, provide an entree for the bankers, who focus on energy, real estate and middle-market deals. The Alberleen Group's advisory board members, who include E. Stanley O'Neal, the former chief executive of Merrill Lynch, are all investors in the company, giving them a stake in the success of its banking teams.

For more, visit www.nytimes.com.