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Agencies of the City and County of San Francisco With Potential Financial Losses Due to LIBOR-Linked Investments

Analysis by Darwin BondGraham1 A. San Francisco Employees' Retirement System 1. SF Retirement currently has interest rate swap contracts held as investments for a total notional of $15.92 million as of June 30, 2011. The net fair value of these swaps was negative $1.267 million. SF Retirement pays 3.6 and 4.3 percent fixed on the notional and receives 3month LIBOR. 3-Month LIBOR is currently at 0.3 percent, and has been below 1 percent since May, 2009.2 The net difference between SF Retirement's fixed payments and 3-Month LIBOR may have been spread by LIBOR manipulation by various banks causing SF Retirement's payments to its swap counterparties to be higher during certain payment periods.

(Table Source: City and County of SF, "Managements Discussion and Analysis, Basic Financial Statements, Required Supplementary Information, and Schedule of Expenditures of Federal Awards With Independent Auditor's Reports," FY2010-2011, p. 71) In prior years, other interest rate swaps were held in San Francisco Retirement's portfolio which could have exposed San Francisco to greater LIBOR rigging losses, beyond simply the losses associated with the collapse of interest rates in 2008. In 2010 the notional amount of three interest rate swaps was reported by the Retirement System as $41 million, with a negative fair value of $4.1 million. See the second table below which details the flow of payments during the fiscal year that ended in June, 2010. (SAN
1 Contact: darwinbondgraham@gmail.com 2 http://www.fedprimerate.com/libor/libor_rates_history.htm

26-27). "Financial Statements and Required Supplementary Information (With Independent Auditor’s Report Thereon)." p." pp. (Table Source: SAN FRANCISCO CITY AND COUNTY EMPLOYEES' RETIREMENT SYSTEM "Financial Statements and Required Supplementary Information (With Independent Auditor's Reports Thereon) Years Ended June 30. These derivatives had a value of negative $8.FRANCISCO CITY AND COUNTY EMPLOYEES’ RETIREMENT SYSTEM.2009 and 2008. 21) . (Table Source: SAN FRANCISCO CITY AND COUNTY EMPLOYEES’ RETIREMENT SYSTEM. 2011 and 2010. "Financial Statements and Required Supplementary Information (With Independent Auditor’s Report Thereon). 28) In 2008-2009 SF Retirement lists investments in "options and swaps" for first time in table summary contained in its annual auditor's report (see below). Years Ended June 30. 2011 and 2010.2 million. but no breakdown was given to determine which were LIBOR-linked derivatives. Years Ended June 30." p.

" (Ibid) As of June 30. In July 2007.] "The expiration date of the 2004 swaps is May 1. in February 2010 (the “2010 swaps”). p. the Airport receives a monthly variable rate payment from each counterparty equal to 63." (City and County of SF. (Ibid. in connection with the anticipated issuance of Second Series Variable Rate Revenue Refunding Bonds.B. Issue 37B/C. and Schedule of Expenditures of Federal Awards With Independent Auditor's Reports. December 2004 SFO: "entered into seven forward starting interest rate swaps (the “2004 swaps”) with an aggregate notational amount of $405. 1. in May 2008 (the “2007 swaps”).9 percent on these swaps: JP Morgan Chase Bank N. and May 1. the Airport entered into four additional forward starting interest rate swaps in connection with the anticipated issuance of its Second Series Variable Rate Revenue Refunding Bonds.. 2011 SFO has 7 outstanding swaps with 3 banks adding up to a total notional amount of $513. 107) .A.29%. SFO pays fixed rates of between 3. All have a net negative value.4 and 3.34%. San Francisco International Airport The San Francisco International Airport has been exposed to potential financial losses from bank manipulation of LIBOR due to its utilization of multiple interest rate swaps in the 2000s to hedge variable rate debt on different bond issuances.85% of USD-LIBOR-BBA plus 0. with a notional amount of $72. Under the 2007 and 2010 swaps." [.." (Ibid) "Under the 2004 swaps. 106) SFO terminated several of these swaps in 2008 and 2010 (3 of the "2004 swaps" associated with bond issues 32 and 33 with notional of $205. Basic Financial Statements.387. the Airport terminated the swap associated with the Series 2010A-3 Bonds. Merrill Lynch Capital Services (Bank of America) Goldman Sachs Bank USA. "Managements Discussion and Analysis.0 million. 2030.5% of USD-LIBOR-BBA plus 0. Issue 33 in February 2006. The expiration dates of the 2007 and 2010 swaps are May 1.0 million. Issue 32A-E in February 2005. Required Supplementary Information. respectively.. 2026. the Airport receives 61. and Second Series Variable Rate Revenue Refunding Bonds. p." FY20102011. and Second Series Variable Rate Revenue Refunding Bonds.1 million). 2029. "In December 2010.000. Series 2010A.