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This is an article provoked by a quite small local development in Indianapolis. But it is actually a fairly big story which turns out to encompass the globe from Japan to Germany and England and on to Ireland and back to New York. It is a story about how Americans in their local neighborhoods working to stay afloat are being ripped off by international finance, hedge funds and derivatives specialists.
Water rates for users of the Indianapolis water system are set to rise by 17.5% over the course of the summer, according to an article by Brendan O'Shaughnessy which was published in the Indy Star on February 20th. The water rates are going up because the state Bond Bank has been forced into a debt restructuing. More than half of the water utility's debt was financed with short term variable interest rate notes. The interest charge on the debt has tripled over the last two years.
"Officials from the Department of Waterworks said the more immediate rate increase is necessary because the financial market crisis has caused interest rates on Waterworks' debt to nearly triple. Interest rates on that debt rose from 3.5 percent to 9.5 percent in the past two years, forcing Waterworks to make $20 million more in interest payments in 2008 than in 2007."
It seems that the Indiana utility's situation was transformed early in January when Depfa Bank insisted on payment in full on a short term basis of a note for $15 million, and refused to agree to grant the utility a grade period which the debt restructuring was completed. By January the Indianapolis Water Works had become a victim of Paulson's closure of Lehman Brothers via the bankruptcy of Depfa and Hypo RE.
"The Bond Bank already was stung at the beginning of this year when it had to come up with $15 million on short notice after Depfa Bank, which held some of the bonds, said it would not forgo a payment while the Bond Bank restructured the debt.Indianapolis Water serves nearly 1 million people in seven counties, with nearly 83 percent of its customers in Marion County."
Depfa Bank is based in Dublin, Ireland. It is an infrastructure financing bank which operates globally, and used to finance long term investments with its own short term borrowings. Depfa is now bankrupt. It was bought in 2007 by Hypo Real Estate for €5 billion. US hedgefund investor J. C. Flowers, who together with Grove International and Shinsei Bank owns more than a quarter of the equity of Hypo RE, was said to be behind the deal. Hypo RE is also bankrupt. Both these financing agencies went under last September after Henry Paulson refused to bail out Lehman Brothers.
Hypo RE went bankrupt it is reported, for example in this piece in the Deal Maker of February 6th to have borrowed short to pass the money through to Depfa in Dublin to finance its long term investments.
"Despite the near failure of two midsized corporate German banks, Munich's Hypo Real Estate is the country's biggest victim of the global credit crunch. It borrowed short-term to cover long-term, public-sector loans at its Depfa Bank plc unit, and that choice proved fatal. As banks cut off short-term financing, Hypo Real Estate found itself seriously strapped for cash and only won a reprieve with €92 billion ($119 billion) in guarantees and cash from public and private sources. Now, under the leadership of new CEO Axel Wieandt, it hopes for state control."
Now the dead are reaching out from the grave to insist on payment from utilities like the Indianapolis Water Works.
This report from the blog Immobilienblasen on October 4th last year, discusses the short term long term financing question and shows how Depfa and Hypo RE were driven into the ground in 2007 and 2008 and what they had to say about what they were doing in their reports. Some of the report is in German, but there is enough in English for the picture to be quite clear.
This incident in Indiana raises at least two other questions. The first being, if the two companies were run into the ground in the way the Immobilienblaser suggests, might there not have been anticipatory positions taken to offset the mounting risk of defaults by selling uncovered Credit Default Swaps as put options by those who knew?
Depfa Bank used to operate in the US through an agency called Depfa First Albany which last year was ranked number 17 nationwide among managing underwriters and financial advisers for public financing deals. This status was referenced by the Bond Buyer in its article on Depfa's sale of First Albany to Jeffries Group Inc on February 17th. Depfa First Albany had 10 offices in the US, and its 75 "public finance professionals" did about $250 billion worth of business over the last five years. The top ten in the public finance and underwriting field were shaken up by last year's collapse and have either disappeared, or become recipients of TARP money from the Federal government. This has left Depfa First as one of the survivors, to this point, in line to claim the remaining business.
The money Depfa invests in US water utilities can come from other utilities. A report of a recent Fitch Rating services assessment of the Masschusetts Water Pollution Abatement Trust mentions this arrangement.
"MWPAT program reserves are generally invested in investment agreements with institutions rated at least 'AA-' by rating agencies. Recently, the ratings for certain investment agreement providers - DEPFA Bank plc., MBIA Insurance Corp., Ambac Assurance Corp., American International Group Inc. (AIG) and Citigroup Inc. - have fallen below the 'AA-' rating level; however, these agreements are collateralized by direct U.S. Treasuries or Agencies in excess of 100%."
J.C Flowers the US investor who figures so prominently in the story is a former Goldman Sachs partner, billionaire and hedge fund owner. Wikipedia supplies the following profile for a brief review, but there is much more out there if any one is interested. He took over the mortgage bank Indymac at the end of last year working together with the Paulson Group (no relation to Henry Paulson). The Paulson Group is where Alan Greenspan works nowadays. Flowers seems to have been one of the people who benefitted from the "yen carry trade" borrowing at zero interest rates in Japan to purchase assets in Europe which could be used to leverage further investments in the US. The Shinsei Bank which partnered his investment in Europe used to be called the Long Term Credit Bank of Japan and was renamed Shinsei after Flowers and his friends took it over.
Meanwhile in Berlin, the German government is trying to figure out what to do about Hypo RE and Depafa Bank. Merkel's government has decided to nationalize the companies. Among the matters left to be resolved are the question of Depfa Bank and then how much the German tax payers are going to pay Flowers and his companies for their equity holding. According to the Irish Times the Germans decided almost a month ago to split off Depfa as a "bad" bank. This week's Spiegel profiles the discussion and its background. According to Bloomberg there has been serious disagreement between Flowers and the Germans over the price. Flowers wants ten times more than the present share price.
Looks like he's someone who bought the businesses, has gotten bailed out at least twice, and it is not clear by how many countries, and is still coming back for more.
What might happen to Depfa when it is cut loose? Who knows? Home base country Ireland seems on the same path Iceland slid down a couple of weeks ago. 120,000 people took to the streets of the capital to demonstrate against the banks a couple of days ago. Opposition politicians are calling for new elections. Here's the press association report. The demonstrations, and the calls for new elections, were fuelled by reports of corruption in the bankruptcy of Anglo Irish bank, which was ruled bankrupt at the end of January by the EEC. The stories of corruption are only now beginning to leak out.
When your utility company sends out the rate hike notices this year, and they probably will, step back and take a breath. Remember the story of the 17.5% rate hike by the Indianapolis Water Works and how it came about. There's a lot of things happen locally. When it comes to the money world most of them are caused by events taking place around the world.