San Diego, Thy Name Is Wall Street

San Diego — There'll be no new day dawning if the city keeps walking on the dark side. Mayor Jerry Sanders pledges transparency, open government, public participation, and accountability, and then bows and scrapes before Wall Street, whose creed is, "Tell 'em only what the law requires, and then tell 'em in legal Latin and in fine print." Opacity, thy name is Wall Street.

Wall Street says it will loan the city money without requiring the airing of dirty laundry -- for a stiff price, of course. Meanwhile, the city's chief financial officer tells the city council as little as possible about such arrangements. Omertà must be contagious.

Certainly, mum was the word on August 2, when councilmembers belonging to the Budget and Finance Committee huddled. Jay Goldstone, the city's chief financial officer, made a presentation about sewer financing. Like most San Diego infrastructure, the sewer system is disintegrating. Because the city lacks past certified audits and a respectable bond rating, Goldstone was telling how the city could borrow $500 million without having to bare its soul. This would be accomplished through a private placement, in which all the bonds would be purchased by one bank or a few would be purchased by a small group of well-heeled individuals or institutions. The ballpark bonds of 2002 wound up being a private placement purchased in whole by one institution, Merrill Lynch, although that was not the original intention.

Goldstone explained that 10 or 11 finance firms had responded to the city's request for proposal, and the list had been narrowed to two giants: Citigroup and Goldman Sachs.

Both proposals were dated January 20, 2006. Goldstone explained that $150 million of the $500 million would go to pay back Bank of America for money it had previously loaned the city. The rest would be used to upgrade the waste-water system. Before the city would borrow the money, it would have to study the sewer rate structure. Of course, there was a possibility that the city would have its credit restored before it would have to resort to such private placement financings; the August 2 meeting took place before the Kroll report was issued.

Then came bad news: the city wouldn't be able to pull off such financings without some rate hike, allowed Goldstone.

Civic activist Mel Shapiro rose to complain that this was the first time the possible $500 million borrowing had come before the city council. The prevailing mentality is, "Just leave it to the mayor," said Shapiro. "But the mayor isn't perfect." Shapiro chastised Goldstone for not providing committee members with a written report so they could study it before the meeting.

Councilmember Jim Madaffer agreed. Councilmember Donna Frye said that a fee increase would have to be based on an audit of the wastewater department, which she has been trying to get for years.

Now, two months later, Shapiro feels just as strongly. City finance executives "treat the council like peasants -- the attitude is, 'We are the overseer and the councilmembers are the sharecroppers,' " he says.

Frye agrees: "We have to have such a report in writing in advance so the public can participate and the city council can ask questions."

Shapiro made a public record request for copies of the Citigroup and Goldman Sachs proposals. They are revealing. Both Citigroup and Goldman Sachs boasted how they are expert in finding creative financing avenues for outfits in lousy shape and without decent bond ratings. For example, Citigroup bragged that it is "the market leader in the underwriting, placement, trading, and sale of municipal bond issues rated in the BBB category or lower." Basically, Citigroup was saying that it is a proficient junk dealer. BBB-rated bonds are the lowest so-called investment-grade issues. Anything lower -- say, BB or B -- is a junk bond. Citigroup went on to say that it's expert at marketing and selling "difficult credits."

Citigroup said it held $12.7 billion in municipal securities. "As the largest municipal investor on Wall Street, Citigroup routinely purchases bonds through private offerings with no disclosure." Secrecy, thy name is Wall Street.

The big bank said it would buy all $500 million of the bonds, and "no disclosure document would be required." Alternatively, it would sell a small number of bonds to well-heeled individual and institutional investors, although this strategy would require some disclosure. It would do all this for above-market interest rates. To keep the details secret, Goldstone crossed out all the proposed interest rates before giving the documents to Shapiro. For the January 2006 period, the proposed rates were rumored to be around 3.6 percent for 5 years and 7.5 percent for 30 years or more -- well above then-prevailing market rates. Of course, those rates would be different now and still different when the city is ready to arrange such private placements, if it ever is.

Goldman Sachs took a similar approach. It said it had much experience helping municipalities with "challenging financial and legal situations." It described how it had been lead banker in Orange County's recovery financings from its 1994 bankruptcy. The firm had committed $1 billion to help California over one crisis. Goldman also reached a new low level in inventing a verb, to wit: "We can be flexible and accommodating in our diligence process in terms of who and what needs to be diligenced." Diligenced?

In touting its knowledge of San Diego finances, Citigroup threw in a curious line: "Citigroup has already negotiated and executed a confidentiality agreement with the City of San Diego in connection with our engagement as senior manager for the City's pension financing." Huh? Frye and City Attorney Mike Aguirre didn't know about that.

I queried Goldstone, who passed my question to another person in the mayor's office. I got no response. But Joseph Christinat, a New York Citigroup executive, confirmed that "We were hired in 2004 to be senior manager of the city's pension obligations." He couldn't talk about what was in the confidentiality agreement.

As it turned out, Aguirre said pension obligation bonds should go to the voters, and Kroll had little good to say about them. So these bonds are in limbo -- mercifully, because they are a classic example of passing obligations to future generations so today's adults can continue to live it up.

Mark Blake, chief deputy city attorney, says that Citigroup and Lehman Brothers were named comanagers of pension obligation bonds in the summer of 2004 -- an assignment that hasn't gone anywhere as the city debates whether these bonds are worthwhile. He doesn't know if city councilmembers were notified. He finds the confidentiality agreement "a bit odd -- I assume it was done on advice of counsel," he says. The arrangement would have been handled under Aguirre's predecessor, Casey Gwinn.

But will this debate be out in the open? Will there be an open discussion of sewer private placement bonds, if there are to be any? Will Goldstone level with the council and the public? Will Wall Street insist on nondisclosure agreements? Will its statements be phrased in indecipherable legal Latin? Obscurantism, thy name is Wall Street. Subterfuge, thy name is San Diego.