Time to Pay the Piper - ACRE Institute

Executive Summary

The City of Saint Paul faces a budget deficit almost every year and must endure annual spending cuts. The Minnesota Housing Finance Agency (MHFA) states that there is a chronic and severe lack of affordable rental housing in the state, and that the production of new affordable housing is critically important. Allina Health closed a floor at United Hospital that was used for the treatment of epilepsy patients and now is trying to force the nurses at its five Twin Cities hospitals to accept changes in their health insurance to save Allina money. Last year, Minnesota Public Radio (MPR) laid off a number of staff in order to trim its budget.

What do all of these have in common? These are all entities that are working for the common good, but are limited financially as to what they can accomplish. Each entity has also been trapped in a predatory financial deal that has been bleeding them of millions of dollars and that would require them to pay millions more in fees if they want to refinance to a more affordable loan. In each of these cases, Minneapolis-based investment bank Piper Jaffray was involved with the broader debt transaction.

There are other non-profit entities in Minnesota that have also been impacted by interest rate swap deals that were either with Piper Jaffray or connected to bonds that the bank underwrote– Children’s Hospitals and Clinics, St. Olaf College, Amherst Wilder Foundation, and the Hazelden Foundation.

Then-Chairman and CEO of Piper Jaffray, Addison “Tad” Piper, was even on the boards of directors of several of these organizations — Allina, MPR, and St. Olaf — when they took out interest rate swaps either with Piper Jaffray or in connection with bonds underwritten by the bank.

Interest Rate Swaps Could Cost These Entities over $600 Million. The interest rate swap deals held by these entities backfired in light of the 2008 financial crash. This was a result of the emergency action taken by the Federal Reserve to slash interest rates to near zero to get the economy back on track. Even though interest rate swaps were marketed and sold as instruments that would save these entities money by protecting them from rising interest rates on their variable-rate bonds, these deals instead became toxic drains.

  • Through the end of 2015, the above entities had paid banks such as US Bank, Piper Jaffray, and Wells Fargo a total of $217 million in net swap payments on deals in which Piper Jaffray was involved.
  • These entities continue to pay the banks another $25 million a year on these deals and are expected to pay $388 million over the remaining life of these deals, from 2016 through 2048.
  • To get out of these deals early, these entities would have to immediately pay the banks $136 million in early termination penalties.