by Calculated Risk on 11/02/2008 09:22:00 AM

“People come up to me in the grocery store and say, ‘How did we get suckered into this?’ ”
Marc Hujik, of the Kenosha, Wis., school board, (quote from NY Times)

A couple of articles about cities and government agencies reaching for a little extra yield and paying the price ...

From the NY Times: From Midwest to M.T.A., Pain From Global Gamble

On a snowy day two years ago, the school board in Whitefish Bay, Wis., gathered to discuss a looming problem: how to plug a gaping hole in the teachers’ retirement plan.

It turned to David W. Noack, a trusted local investment banker, who proposed that the district borrow from overseas and use the money for a complex investment that offered big profits.

Big profits? This sounds like a Nigerian email scam.

Whitefish Bay’s school district did not intend to become a hedge fund. It and four nearby districts were just trying to finance retirement obligations that were growing as health care costs rose.

Mr. Noack, the local representative of Stifel, Nicolaus & Company, a St. Louis investment bank, had been advising Wisconsin school boards for two decades, helping them borrow for new gymnasiums and classrooms. His father had taught at an area high school for 47 years. All six of his children attended Milwaukee schools.

Mr. Noack told the Whitefish Bay board that investing in the global economy carried few risks ... “What’s the best investment? It’s called a collateralized debt obligation,” or a C.D.O., Mr. Noack said. ... “We’re being very conservative,” Mr. Noack told the board, composed of lawyers, salesmen and a homemaker who lived in the affluent Milwaukee suburb.

We all know how that worked out. Read the story - there are similar stories for other cities and government agencies.

And from the LA Times: In England, ruing the decision to put money in Iceland banks

Uttlesford is just one of dozens of local authorities in Britain that have parked money, nearly $1.5 billion in total, in Icelandic bank accounts, which were aggressively promoted in this country as high-yielding, but safe, investments.

Well-known charities, nonprofit groups and institutions such as Oxford University and a cancer hospital in northern England put their funds in Icelandic banks.
...
When those banks started sinking with stunning swiftness around the beginning of October, Reykjavik was forced to intervene and, essentially, nationalize Iceland's largest financial institutions. ... The British government's pledge to back up individual investors' deposits up to $80,000 failed to calm nerves, and also did not apply to bodies such as local governments and charities.

And this quote from the LA Times sums it up:

"It was a move away from our normal practice," John Mitchell, the [Uttlesford District Council] chief executive, said of the offshore venture, adding ruefully: "It all went painfully wrong."
emphasis added