Financial collapse and a Wisconsin school board

by Mathew on November 2, 2008 · 8 comments

I’ve read a lot of articles about the financial meltdown in the United States and elsewhere, about the credit collapse and the rise of systemic risk, etc. — but few of them have contained a paragraph that is as telling as the one below, which is from a New York Times front-page feature on the crisis and its origins, and how the damage has spread:

On a snowy day two years ago, the school board in Whitefish Bay, Wis., gathered to discuss a looming problem: how to plug a gaping hole in the teachers’ retirement plan.

It turned to David W. Noack, a trusted local investment banker, who proposed that the district borrow from overseas and use the money for a complex investment that offered big profits.

“Every three months you’re going to get a payment,” he promised, according to a tape of the meeting. But would it be risky? “There would need to be 15 Enrons” for the district to lose money, he said.

The board and four other nearby districts ultimately invested $200 million in the deal, most of it borrowed from an Irish bank.

How on earth did we get to a point where a school board in small-town Wisconsin comes to the conclusion that in order to bolster its retirement plan, it should borrow tens of millions of dollars from an Irish (but really German) bank and then invest it in a complex, hedge-fund style investment? In what kind of world does that sound like a sensible thing to do?

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