When Lehman Brothers told Stockton that issuing $125 million in pension obligation bonds would be similar to exchanging liabilities, that may not have told the entire story. Now one economist is saying the defunct bank misled the City, where officials are now trying to get out of paying back the bond.

Shortly after the decision was made in 2008 to issue the bonds, the world markets collapsed, leaving Stockton with increased contributions to CalPERS, whose returns plummeted from 10.2 percent to a negative 27.8 percent. On top of the contributions, the city faced the costs of repaying the bonds.

Now the City is in bankruptcy, hoping to cut down on much of the debt it owes, including the POBs from 2008. The bond insurance company, Assured Guaranty, is fighting the effort as it would lose millions on the deal should the Courts side with the City’s bankruptcy plan.

All blame does not rest on the bank’s shoulders, and everyone seems to agree. The City Council voted for contracts, voted to issue the bonds, and their votes made the city’s situation worse.

From the Stockton Record:

A University of the Pacific economist lent ammunition to Stockton’s bid to reduce its debt on $125 million in pension obligation bonds, arguing that a now-defunct investment bank used “deceptive and misleading” tactics to gloss over the risks of issuing the bonds in 2007.

Jeffrey Michael, director of Pacific’s Business Forecasting Center, said in his quarterly economic forecast released Tuesday that “Lehman Bros. bankers falsely told Stockton officials that pension obligation bonds were ‘an exchange of liabilities,’ ” presenting the bond issue as a simple debt refinance.

Read the full article here.