It was just a couple weeks ago when news broke that the second largest municipal bankruptcy in American history was upon us. Jefferson County Alabama (Birmingham) went belly-up because toxic interest rate derivatives were used to help finance the county’s sewer system. Turns out? Those risky interest rate swap derivatives had no legitimate investment use but were bought because they produced kickbacks.
What? Of course that raised our eyebrow. Particularly because we’re familiar with the scent of investment corruption due in large part to the shenanigans at the Kentucky Retirement Systems.
It appears that the Metropolitan Sewer District has purchased $78 million in similar interest rate derivatives for no legitimate reason that we can find. Could it be a move to line pockets and generate commissions for a broker? Maybe to make a little easy money for bankers? You tell us.
Who is Michael Garner of Enhanced Financial Solutions? The firm is based in Paoli, PA and pushed MSD into these risky derivatives investments. He sold interest rate swaps issued by Bank of America, Deutsche Bank, Morgan Stanley and Wells Fargo. Take a look at MSD’s annual financial report (Warning: External PDF Link) for the fiscal year ending June 30, 2010. Pay close attention to pages 44 through 48.
Garner, if you’re just using common sense to guess, likely made three times what Larry Zielke made off of MSD.
Could he be the brother/relative of Gordon Garner, the former executive director of MSD?
MSD lost $19 million on swaps during the 2010 fiscal year. There’s no legitimate reason for MSD to invest in these swaps. None. Unless the purpose was to generate profits for investment banks and their broker.
Some background: Garner sold toxic derivatives for a company called IAMGE until the FBI raided the place. He left to run two other companies: Enhanced Financial Solutions and Echo. The Butler, PA school district has alleged in a lawsuit that JPMorgan conspired with Investment Management Advisory Group Inc, or IMAGE, to hide fees and push the district into an unfair trade. Mike Garner was the lead broker for IMAGE.
The company was further implicated in FBI probes and Garner and IMAGE were specifically mentioned in this Department of Justice complaint (Warning: External PDF Link).
Before you ask – the MSD internal auditor who was guarding the candy store when most of these toxic derivatives were traded? Her name is Connie Davis. She now does the same work for the KRS. And Garner’s deals are eerily similar to those of KRS placement agent Glen Sergeon, a man we’ve written about quite a bit on Page One.
Here’s hoping your state auditor does a more thorough audit of MSD than they did with the KRS.
6 responses so far ↓
1 E // Dec 5, 2011 at 12:05 pm
It’s worth noting that these IRD’s lost value because the interest rates went down and stayed down.
Given the Federal Reserve’s commitment to hold interest rates at low levels for protracted periods of time…this trend of losing millions of dollars, will end no time soon.
Kind of like a nightmare you can’t wake up from.
2 G'town Reader // Dec 5, 2011 at 2:41 pm
Dammit! You’ve made my hands sweat…
3 keatssycamore // Dec 5, 2011 at 5:16 pm
Thanks for this. I’d long suspected that the EPA consent decree had just enough zeroes in it to bring out the brokers and their swaps. As you note, we could see it coming based on Birmingham’s situation AND MSD’s pathetic governance.
4 The Highlander // Dec 5, 2011 at 5:16 pm
Happy Pants ran a hell-of-a-good administration over here in Lousyville — what with Ms. Butler, Ms. Mershon, the Housing Dept, Cordish, Titan and now this boondoggle at MSD. Why can’t the Kentucky newspaper report this like it beat up on Dirty Judy?
I want to know who at the Kentucky newspaper Happy Pants has pictures of — cause he’s got to or they would have investigated his rear end (tusch) off.
5 jake // Dec 5, 2011 at 5:49 pm
There was a new lawsuit filed on November 29 regarding MSD.
Have you heard much about it in the mainstream?
Yes, that’s rhetorical.
6 cheekman // Dec 5, 2011 at 7:37 pm
Haven’t really heard shit about it and won’t, It’ll have to really Explode for the C-J to post anything on it .
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