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The City coughs up more than $15 million annually to support a ballpark that was supposed to pay for itself. That expense would be $3 million to $5 million a year less if city hall had not agreed to sell AAA-rated, insured ballpark bonds for an astonishing 7.66 percent interest rate in February of 2002. There was no competitive bidding. One underwriter (Merrill Lynch) got the right to handle the whole package.

The ballpark bonds are among City financial instruments being probed by the Federal Bureau of Investigation. Although this kinky deal seems the most obvious place to look for shenanigans, it "remains a mystery," says city attorney Mike Aguirre. Corruption in municipal bond offerings is becoming a national scandal.

The City had hoped to refinance the bonds at a lower rate, but in the current chaos it can't do so.

In the weeks before the bond sale, Peter Q. Davis, onetime mayoral candidate, incurred then-mayor Dick Murphy's wrath by emphasizing that the ballpark bonds could be sold at an interest rate 2 or 3 percentage points lower, the standard for AAA-rated, insured municipal bonds at that time. He intended to express his view at a meeting on the bonds. He was booted out and "was never invited back," he says.

Today, Davis is torn. On one hand, he blames incompetence and bureaucratic boobery for the bond fiasco; the adventure "looked far more like a slapstick comedy than an Enron board meeting," he says. "City staff was lazy; that was why they pushed for exclusive dealings with one underwriter."

On the other hand, it has never smelled right. "I realize there was a lot of money being made on this bond issue, and the reasons for decisions may have rested in other than laziness," says Davis, downtown mover and shaker and former bank chief executive.

So was it ineptitude or corruption? A good case can be made for some of each. The deal was typical San Diego: the City government and Superior Court bent over backward to accommodate an establishment developer -- in this case, John Moores, Padres majority owner. According to the 1998 ballpark vote, the Padres could only "fine-tune" the ballpark development project mix; if there were substantial changes in the number of hotels, retail establishments, office complexes, and condos, there would have to be another vote.

On November 20, 2001, the council relieved the Padres of 66 percent of their pledge to build offices and 33 percent of their requirement to build retail buildings, among other forgivenesses, permitting Moores to substitute housing. Three weeks later, retired law professor Robert Simmons challenged this switcheroo in court, saying such draconian changes hardly represented fine-tuning and would diminish tax receipts while increasing infrastructure costs.

But this was San Diego. The City declared that unless it got an accelerated hearing and a decision in its favor by late January, the Padres would leave town. Hardly surprisingly, the judge nodded assent, and Simmons was not given time to do discovery or prepare his case. In particular, he wanted to bring in an expert to determine how the changed development mix would affect property taxes. Without the originally planned number of hotels and retailers, would the City get the promised hotel and sales taxes to offset bond interest payments?

"Fine-tuning had become course-redesigning," says Stanley Zubel, who was Simmons's attorney. "We needed an expert from outside the county; the ones here are locked up by the old-boys' network." But the judge wouldn't grant the time. Simmons dropped the case. What happened? Moores sold land he had received at lowball prices to condo developers. But condos eat up in infrastructure and services costs what they provide in real estate taxes. Without the promised hotels and retailers, there aren't sufficient taxes to help service the bonds. Now, the coming condo bust will intensify the problems.

Once the Simmons case was out of the way, the City rushed the bonds to market. The final prospectus had errors -- for example, overstating the funded ratio of the City's pension plan. The City had to pay "about double normal insurance costs," says Davis -- and the insurance company, if it had to pay bondholders, had the ability to go back and recover its costs from the City.

"That is not an insurance policy in the traditional sense," says Zubel. It's called a financial-guaranty insurance policy -- "like saying 'dry water.' "

The prospectus told how Wall Street's Mr. Big, Merrill Lynch, would buy the bonds and could sell them only to well-heeled institutions or individuals with a net worth of at least $25 million. San Diegans were outraged. If these bonds yielding 7.66 percent were insured, why could they go only to the superrich?

On March 17, 2002, the Union-Tribune reported in a front-page story that the bonds had already been sold to 32 wealthy investors, and Merrill would not disclose their names. The author of the story, Jonathan Heller, says he talked to a Merrill Lynch spokesman and a high official of the City and both said the bonds "either had been sold or were in the process of being sold."

But on October 10, 2005, the Wall Street Journal revealed the truth: Merrill Lynch never sold the bonds. The firm claimed that it had been "extremely difficult" to find buyers -- an assertion that lacks believability. Hard to find buyers for AAA-rated, insured bonds yielding 7.66 percent, about 3 percentage points higher than equivalent municipal bonds? Please.

Bill Halldin, Merrill Lynch spokesman, says that the City attached onerous conditions to the bonds. For example, they could be repurchased, or "called," in three years, earlier than most municipal bonds. But who wouldn't put up with an early call date to get such high rates on an insured, tax-free bond? Because the bonds got a qualified rating from the City's counsel, they could be considered taxable. But that juicy 7.66 percent rate would have been a good taxable yield too. At any time, only 32 buyers could own the bonds, thus Merrill Lynch would have had to monitor the resale market. But brokerage houses are paid to perform such administration.

"At no point did we have a commitment to sell those bonds," insists Halldin, who has no explanation for why the Union-Tribune reported they were already sold or being sold.

"Merrill Lynch got its cake and ate it too," says Zubel. "It got a high interest rate and got the insurance. That suggests that Merrill Lynch was on the inside when it came to knowing the true financial precariousness of this city. It creates the appearance that the firm had more knowledge about the pension problems and the chickens that would come home to roost than the average person."

Replies Halldin, "Merrill did not know about the city's financial problems at the time." Someone with stock in Merrill Lynch, concerned that the company could wind up owning a money-draining ballpark if San Diego goes bankrupt, could ask: why didn't Merrill know? A brokerage is supposed to do due diligence on stocks and bonds it handles.

This is an especially intriguing question since a so-called "smoking gun" memo that later surfaced suggested that Murphy's Blue Ribbon Committee on City Finances held up its report warning of the pension problem until the ballpark bonds went to market.

Says Davis, "My belief at the time was that Murphy was very uncomfortable making presentations to [the investment community]. So I assumed he was relieved that this solution [a monopoly underwriter] freed him of the need to leave town and make a presentation before tough questioners. Of course, if he were aware of the worsening financial problems of the City, this would likely have increased his discomfort making public statements to the contrary. But this is just speculation and connecting the dots on my part."

Throughout the period, Murphy "seemed concerned with spinning the financial situation of the City, without the financial documents to support it," says Davis. "I don't mean to imply he was not telling the truth, just speaking like a politician and assuring everyone things were fine."

Davis and Merrill Lynch will not say whether they have been interviewed by government investigators. Zubel says he has not. I could not reach Murphy; his former aide, John Kern, did not return an e-mail posing queries.

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