The principal agent of ten University of California schools is not students, their parents, teachers nor administrators. The principal agent of the ten UC’s is a set of people who work with banks. “What is clear is that over this period, big banks marketed interest rate swaps to public organizations like UC” (5). The bankers who prepared the UC Board of Regents to make irresponsible money management decisions are people who “served on the board of major Wall Street banks,” such as Monica Lozano who moved from Bank of America to the UC Board of Regents in 2006 (9).
The main tool used by the UC Board of Regents that brought about irresponsible money management skills is the interest rate swap. “UC managers entered into derivative contracts called interest rate swaps. These swaps promised lower borrowing costs than traditional fixed-rate bonds” (4). The authors of “Swapping the Future” give a clear explanation of interest rate swaps in the Appendix on page twelve (12).
What do trustworthy and competent money managers say about the UC’s irresponsible money skills? The authors encourage the UC Board of Regents to change their strategy and to improve their management skills. “Without a change in strategy, UC’s financial management could compound costs for students, workers and faculty…” (3). Leighton Woodhouse at the California Political Review writes, “[M]uch of that new tax revenue will be routed away from tuition relief and toward the very Wall Street firms that — with the Regents’ help — created the financial crisis that accelerated the higher education crisis in California in the first place.” Proposition 30 was falsely advertised as a way to lower tuition costs and will be used instead to fix mistakes caused by the UC’s irresponsible money skills. [Woodhouse: https://tinyurl.com/msrwkvza.]
The history of the UC Regent’s poor money skills began in 2003 when bankers persuaded the UC Regents to buy interest rate swaps. “Between 2003 and 2007, UC entered into three separate agreements involving interest rate swaps with five different investment banks” (4). Then in 2009 the UC Board of Regents created a new “Chief Financial Officer (CFO)” position for Peter Taylor from Lehman Brothers/Barclays Capital.
There UC Board’s irresponsible money skills is analogous to the subprime mortgage crisis of 2008. “UC management is now using its ability to borrow against future tuition increases to engage in some of the same borrowing practices that led to disaster on Wall Street” (3). Just as Wall Street lost money from people who bought homes that they could not afford in 2008, the UC Board of Regents is losing money from students who buy tuition that they cannot afford.
A clear sign that the UC Board of Regents have irresponsible money management skills is its rejection of the polite requests for information from the five authors of this clear report. “Despite requests by the authors of this report, UC management has not provided documentation for the original swap agreements” (5). Again, “Despite inquiries from the authors, UC executives have provided no explanation for their inaction when it comes to renegotiating interest rate swaps” (8). And, “[A]t the time this report went to print UC executives had provided no explanation for why they have not sought to renegotiate UC’s swap agreements” (10). Perhaps the UC Board of Regents are not “sufficiently transparent and accountable” (10) to curious graduate students, because they acknowledge they have irresponsible money skills.
The term ‘Seven Cardinal Sins’ is a composite name for a set of vices that includes anger, envy, gluttony, greed, lust, pride and sloth. Greed is probably the motive for interest rate swaps which brought about the irresponsible money management in the UC Regents. Websters Dictionary defines “greed” as the “inordinate or all-consuming and usually reprehensible acquisitiveness especially for wealth” (1966: 995). The authors of Swapping the Future express how the Regents became consumed with interest rate swaps and left “behind the UC’s core public education mission” (2).
A reasonable motive for the activities of the UC Regents is stated in their Bylaws. “The Regents of the University of California shall be vested with the legal title and the management and disposition of the property of the university… for the benefit of the university…” (5.1.f ). Rather than use its power “for the benefit of the university,” it seems that the UC Regents use their power for the private enriching of themselves. “[M]anagement used much of the borrowing to invest in areas outside of UC’s core mission that were seen as potentially more profitable” (5). Thus, greed for potential profits led to an irresponsible and unethical debt. [Regents' Bylaws: https://tinyurl.com/ms8k4cce]
Some of the passions that are triggered by Swapping the Future are sadness and hope. Sadness is felt when learning about the large amount of debt caused by irresponsible money management. “UC management has more than doubled the university’s debt burden from $6.9 billion in May 2007 to $14.3 billion at the end of 2011” (1). As a result, tuition has “increased 300% since 2002” (1). A person can also feel hope when discovering that the five authors of Swapping the Future give practical directions on how to bring about responsible money management (1 and 11). One hopeful recommendation is the following: “UC should seek to renegotiate its existing interest rate swaps with Bank of America and Deutsche Bank” (11).We all make mistakes and reviewing our plans and asking for help with our plans are two ways to minimize mistakes.
Upon reviewing the above analysis of Swapping the Future I have decided that my two favorite reasons for concluding that irresponsible money management belongs to the UC Regents are the instrumental agent and motive. Interest rate swaps are risky tools for making a profit and building credit. Plus, greed can easily motivate a person to try using interest rate swaps in order to make quick profits. However, we need to throw greed out the window and become motivated by logic and ethics and learn from professionals, such as the five writers from the graduate schools at UC-Berkeley.
© By Theodore Faulders, October 29, 2013.