On Tuesday, September 20, 2016 the Roosevelt Institute and the ReFund America Project released a new report, The Financialization of Higher Education, examining the impact of toxic interest rate swaps on Universities and Colleges across the county. The report reveals a massive backdoor transfer of student tuitions to Wall Street banks – often at the expense of taxpayers.
The report found $2.7 billion in unnecessary losses on interest rate swaps in a case study of 19 universities. The University of Illinois lost $61 million, and at other universities including the City Universities of New York and Georgetown University, the swap losses reach into the hundreds of millions.
TIME reporter Rana Foroohar in an article covering the report wrote, “Sold a bill of goods by Wall Street, they’ve entered into contracts that have now gone bad, costing them much more than they expected. As Deane Yang, head of research at the New York based debt management advisory firm Andrew Kalotay Associates puts it in the Roosevelt report, the schools sit on ‘an uneven playing field’ when trying to negotiate such deals. ‘Basically, you have a gullible counterparty and a much more sophisticated one.’”
Advocates for higher education and students concerned with the cost to their own school took to social media highlighting the report’s key findings:
So what can be done?
These toxic interest rate swap deals – the same shady financial deals that led to the closing of public schools in Chicago, contributed to the bankruptcy of Detroit, and water shutoffs in Baltimore – are likely a violation of the federal regulations which govern the activities of banks who lend to public entities (MSRB Rule G-17). To recover lost funds, and discourage financial institutions from preying on cities, states, universities and the students who pay tuition, states can sue the banks for fraudulent concealment or misrepresentation. The Securities and Exchange Commission could also investigate and bring an enforcement action against the banks for disgorgement of their ill-gotten gains.
In Illinois, the most immediate threat is a fast-approaching payout on similar swap deals. Illinois will be on the hook for nearly a billion dollars this November 27th, if Governor Rauner does not renew five key letters of credit. The first step to protecting Illinois students and taxpayers is for Governor Rauner to prevent this unnecessary payout of $870 million. With a stop gap budget that only funds Illinois state Universities and colleges for 3 more months, and doesn’t fund the MAP grant program at all, Governor Rauner must choose students over bankers.