Irish bank declares Wis. school trusts in default, moves to seize remaining assets

Irish bank declares Wis. school trusts in default

MADISON, Wis. — An Irish bank that loaned $165 million to five Wisconsin school districts for investments that went bust said Wednesday it is moving to reclaim what is left in the accounts and speed up repayment.

Bill Broydrick, a lobbyist for Dublin-based DEPFA Bank, said the bank declared the districts’ trusts in default and was seizing the $5.6 million left in them. He told an Assembly panel the bank took the action “after it became clear that they were unwilling to meet their obligations.”

“We’re basically saying ‘We’ve asked you to pay, you’ve violated the covenants of the bond issue, and therefore we’re accelerating the payments’,” he said in an interview. “All of the assets of the trusts have been scooped up by DEPFA.”

The Kenosha, Kimberly, Waukesha, West Allis-West Milwaukee and Whitefish Bay districts set up the investments known as collateralized debt obligations, or CDOs, to help pay for health and pension benefits promised to retirees.

They used the $165 million loan from DEPFA and $35 million in tax dollars for the investments, which lost nearly all their value during the global economic crisis. The districts are suing Stifel, Nicolaus & Co. and the Royal Bank of Canada, which put the deals together, claiming they were fraudulently sold as safe investments.

CDOs are securities backed by pools of mortgages or other assets. They plummeted in value after the credit crisis erupted in 2008 as investors fled all but the safest forms of debt.

A Milwaukee County judge in January allowed the case to proceed by denying motions to dismiss by the defendants, which argued the districts were informed of the risks and hadn’t proved fraud. In the meantime, DEPFA, a subsidiary of Germany-based Hypo Real Estate Holding AG, has been pressuring the districts to pay the loan back.

The West Allis-West Milwaukee district has paid back $10 million, but Broydrick said the bank is still owed roughly $150 million. Broydrick said DEPFA wants to negotiate repayment agreements with the districts, but four of out of five of them have refused to meet.

District representatives have said they intend to repay DEPFA, which was not involved in creating the CDOs, if they win the lawsuit.

C.J. Krawczyk, a Milwaukee lawyer who represents the districts, said DEPFA’S seizure of the money was expected for some time and downplayed the impact on the districts’ finances.

He said the bank’s demand for repayment will require each district’s business manager to include a line item in their budget proposals later this year with the amount of their outstanding loans. It will be up to each school board to decide whether to pay them, he said.

The news came as the Assembly financial institutions committee heard testimony on a bill that would give additional protections to school districts that enter into such investments.

The bill would make clear that districts are not sophisticated institutional investors, which would require brokers and investment advisers that sell them investments to be regulated by the state. Sponsor Rep. Peter Barca, D-Kenosha, said the goal was to protect taxpayers and prevent more districts from entering into risky investments.