The School District of Philadelphia is considering filing suit against Wall Street banks, City Paper has learned, for illegally manipulating a major interest-rate index underpinning complex derivatives that have cost cities and schools billions of dollars.
“The School District is currently in the process of analyzing whether or not the agency has a sufficient basis for pursuing claims against financial institutions which may have been involved in the manipulation of Libor,” a district spokesperson wrote in a short statement issued to CP.
Philadelphia and other cities have filed similar lawsuits, contending that such “interest-rate swaps” — billed as a protection against rising borrowing costs — were tilted in banks’ favor through the fraudulent rigging of the London Interbank Offered Rate, or Libor.
The School District took out swaps with Wachovia (purchased by Wells Fargo in 2008), Merrill Lynch, Goldman Sachs and Morgan Stanley. But a lawsuit could name more banks as defendants. Philadelphia’s lawsuit names banks that were direct counterparties and also those that are accused of rigging Libor, including Citi, JPMorgan, RBC, Bank of America, Barclays, Credit Suisse, Deutsche Bank, RBS and UBS.
It is unclear when the district, which is run by the state-controlled School Reform Commission, will decide whether to file suit, and what damages might ultimately be sought.* The city could seek tens of millions of dollars, says Quinn Emanuel attorney Steig D. Olson, one of the lawyers representing the city. The precise damages at stake — a matter of figuring out how particular Libor manipulations affected particular swap deals — will be determined through discovery.
The final damages will likely be contested. And profoundly complex.
A successful lawsuit, however, could provide sorely needed revenue to Philadelphia schools, which are experiencing the most recent and severe of recurrent fiscal crises. Budget cuts orchestrated by Gov. Tom Corbett have exacerbated historic underfunding, while rampant charter-school growth has siphoned money and students. The result is a “doomsday” budget gap of $304 million and the resulting layoff of 3,859 teachers and critical staff. This after 24 schools were closed for good in June. Only a small portion of that gap has been filled — and only tenuously so. Just a fraction of laid-off workers have been called back.
The District has also borrowed more money and sunk further into debt. As CP reported in May, Philadelphia schools debt service is ten times the national average. More…