Senator Bernie Sanders,

The record profits made on Wall Street reported this week are an atrocity, offense and tragic mockery of our federal government and our national economy.  The method in which these profits were made, as well as unfair advantages offered specifically to Goldman Sachs, demonstrates a failure of change on Wall Street.

Power brokers familiar with the revolving door between Washington and Wall St. are directly responsible for the financial crisis as well as the current jobless recovery.  Key officials in the Federal Reserve and National Economic Council wink and nod to the managers of Goldman, their recent employer.  Together, appointed officials and investment bankers shake hands in full daylight, assuring the media that all is well, while conspiring in the foreign language of finance few can understand.  

Senator Sanders, everyone who works on Main Street, America, is fuming about this travesty of capitalism.  

con’t below the fold

The promise of the American Dream is based on a democratic government that can provide a level playing field for everyone who works hard and uses their wit, experience and a bit of luck to succeed.  Entrepreneurs who create tangible products and services that benefit our economy have yet to see any benefit from the trillions of dollars released to the traders and hawkers of imaginary wealth.  The American Dream has died.  All we see now is a parade of Robber Barons who do not play fair or pay their fair share.  

I ask you, Bernie, to bring this issue to the forefront of attention.  Because you are committed to several other important policy changes, I ask you to speak earnestly with your colleagues who have the position and power to effect immediate change.  There need to be hearings and if necessary, and independent investigation of leaders in the National Economic Council and the New York Federal Reserve.  

As always, I appreciate your work and will never forget the opportunity to help introduce you at the American Legion in Northfield.  Bernie, you represent the political pride of Vermonters and have always been the man people can turn to when action is required.  I look to you to take the time to speak with your colleagues in the Finance Committee to begin to address a corrupt conspiracy between Washington and Wall Street and the death of the American Dream.

Yours sincerely,

Nate Freeman

# # #

What if you knew her/ And found her dead on the ground / How can you run when you know? — Neil Young, “Ohio.”

In 1970, American folk/rock singer, Neil Young, sang his timeless tribute to the four students who were killed while protesting the American invasion of Cambodia during the Vietnam War. Neil Young's song, “Ohio,” reminds us of the Kent State Massacre on May 4, 1970, a terrible event that sparked a national uprising against the United States government and the Nixon Administration.

I thought of Neil Young's song yesterday, June 20th, when I first saw the video of Neda Soltani's tragic death. The uncensored video is something most Americans, safe in their homes, do not want to see because it is considered “too graphic.” Yet I watched the video of her death over and over again, knowing that, as upsetting as it is to watch a young woman die so suddenly, it is a responsibility to do so in order to see the face that shows us the real cost of freedom. Neda, whose name was still unknown to the world on the day she died, shows us the unrelenting truth of the sacrifice of Iranians during this hopeful, courageous and inspiring struggle against their government for a freedom they deserve.

From Drop Box

On May 4, l970 members of the Ohio National Guard fired into a crowd of Kent State University demonstrators, killing four and wounding nine Kent State students. The impact of the shootings was dramatic. The event triggered a nationwide student strike that forced hundreds of colleges and universities to close.  

When I searched for a video of Neil Young singing, “Ohio,” I was fortunate to find a live taping from 1989, shortly after the Tiananmen Square protests. Young introduces the song, saying, “This is a song for the students killed in China this summer.” These were the students who sat in peaceful protest against their government until they were shot or run over by tanks. They, too, will always be remembered.

Today, one day after Neda's sacrifice, I extend this tribute to all people who have dared to stand up in protest in their struggle against oppression. I humbly hope that the people of the world will see the true sacrifice for freedom in Neda's face, and in the struggle of Iranians today.

The image of Neda will forever join the image of a fearless Chinese student standing down four army tanks in 1989, and of a 14 year-old girl kneeling over the body of a slain student at Kent State University.

*

Here's a link to Eugene Jarecki's, “Why We Fight.” Incidentally, Jarecki lives in Vermont and owns the Big Picture Theater & Cafe in Waitsfield.

Nate Freeman

Just a quick note to say goodbye to friends of Green Mountain Daily as I turn my attention back to business.  I have a humble little start up company, Green Mountain Kitty Litter, that will need at least 60 hours/week to make successful.

It's been a good run for about two years and I'll have to say I found Green Mountain Daily to be a great community and an enlightening place to learn the ins and outs of Vermont politics.  

As my path turns from GMD to GMKL, I tip my hat to all and bid everyone an appreciative farewell.

Respectfully submitted,

Nate Freeman

NateFreeman@gmail.com 

From Green Mountain Daily

As many GMD readers are aware, I have submitted a formal request for a state audit of the Vermont Student Assistance Corporation.  This request was cc'd to the members of the Senate Finance Committee and the Treasurer's Office.  

Since I have stated my concerns about VSAC's current financial status both here on GMD as well as Vermont Tiger (it's a non-partisan issue), I will offer the Treasurer's response below the fold without comment.

For those who may not have read the VSAC series, here are the links.

VSAC:  Burning Cash Fast

VSAC's $50 million bailout request

An Immoral Obligation

Request for Audit

Obama's Direct Lending Program

Testimony before the Senate Finance Committee 

 
The official response from the Treasurer's Office is just below the fold.

In even more bad news for VSAC, the Obama Administration today announced an end to subsidized student lending as it directs it's resources to direct government lending.  

This is a seismic shift in the student lending industry, and one that will push VSAC out of the loop.

Reports in Forbes, Bloomberg and CNNMoney tell the story. 

Obama Calls for End to Loan Subsidy for Sallie Mae, Citigroup 

By Jonathan D. Salant

Feb. 26 (Bloomberg) — President Barack Obama would end government subsidies for student loan providers such as Sallie Mae and Citigroup Inc., with the government becoming the sole provider of federally backed college lending.

The government currently offers direct loans through colleges, as well as guarantees loans made by private lenders such as New York-based Citigroup and Reston, Virginia-based Sallie Mae, officially SLM Corp.

SLM Corp. fell as much as 37 percent after Obama’s budget was released. Shares of SLM, known as Sallie Mae, fell 36 percent to $5.36 at 11:29 a.m. in New York Stock Exchange composite trading.

Obama said shifting to direct student loans would save more than $4 billion a year, which would be used for more student aid. Private companies would service the loans. In 2007, President George W. Bush signed legislation cutting subsidies to providers by $20.9 billion over five years.

Overall, Obama’s proposed budget provides $46.2 billion in budget authority for education, which he called one of the three major challenges the U.S. must address.

“In a global economy where the most valuable skill you can sell is your knowledge, a good education is no longer just a pathway to opportunity – it is a prerequisite,” Obama told a joint session of Congress on Feb. 24.

In follow up to the ongoing research on VSAC's request for a $50 million moral obligation, multiple sources have unearthed more bad news about the lender's financial status.  I have quoted one of the sources in a letter below the fold.

Subject:  Formal Request of Due Diligence and State Audit of VSAC prior to passage of H.166

Source:  VSAC December 31, 2008 Balance Sheet

February 25,2009

To:

Senators of the Finance Committee;
Treasurer, Jeb Spaulding;
VSAC Directors, Jeb Spaulding and Anne Cummings;
George Thaubalt, Auditor's Office
Senator and Former State Auditor, Randy Brock

In follow up to my testimony last week regarding VSAC's request for a $50 million moral obligation, I officially request an immediate state audit and a due diligence report confirming the financial status of the public non-profit lender.

The information I offer below comes from a highly credible source relaying data from VSAC's December 31st Balance Sheet.

Because this information is accessible by only a handful of people, it is my firm request that all VSAC employees, with exception of the executive officers, are publicly assured of their protection through Statute 507 of Title 21 relating to Whistleblower Protection. 

It is my sincere hope that this request is taken extremely seriously and that action will be taken per my request.  A decision to rush VSAC's request for $50 million in moral obligation through the legislative process without a review of the lender's current financial status may result in a significant liability for Vermont and Vermont taxpayers.  With regard to VSAC as a financial institution, it is a fiduciary responsibility to assess the level of risk associated with H.166.

Respectfully submitted,

Nate Freeman

( – promoted by odum)

“Let's say a son in-law wants to buy a $100,000 apartment building as income property, but he only has $3,000,” Little suggested in testimony.   

Metaphorically, Little is referring to VSAC's request to raise about $230 million of capital in the municipal bond market.  The particular market VSAC jumped into last May requires a line of credit as collateral.  In January 2008 VSAC bonds began to fail in the Auction Rate Securities market.  The ARS market as a whole failed by early May and now VSAC is stuck with $1.7 billion in failed ARS bonds.

(Nate “mydog” Freeman’s continuing quest for an audit, or some sort of accounting or accountability to pierce the mysterious, and uniquely peculiar veil of secrecy shrouding VSAC’s finances, all in light of questions that have arisen over similar operations across the country. We should all be asking at this point why the press seems completely uninterested… – promoted by odum)

Is VSAC to Vermont what Wall Street is to the Nation?

Testimony before the Senate Finance Committee:

H.166: A Bill Relating to VSAC

by Nate Freeman

Introduction

Thank you Senator Cummings, Senator McCormack, officers and members of the Finance Committee.

My name is Nate Freeman, I am a school board member in Northfield and I hold two appointed positions on the local level. My qualifications to speak on the subject of this bill come from prior experience as a financial professional. In 2005 I formed a fee-only RIA firm, Freeman Financial, LLC, through a rigorous BISHCA approval process. I hope the committee appreciates the value of knowledge I bring to the discussion today.

See H.166 testimony, after the flip.

H.166 is not an easy piece of legislation to decipher. One legislator referred to the bill as “legal and financial gobbledygook.” I think the majority of legislators might agree with this assessment since few have specialized knowledge in debt securities. Because the debt market is so arcane, legislators might pause to ask questions if only they knew what questions to ask. Given the financial crisis, asking the right questions about H.166 is more important than ever.

I am here today to help the Finance Committee ask timely and appropriate questions relating to VSAC's request for a $50 million moral obligation to enhance the lender's credit.

The questions I will offer come from heightened concern. When I read the news of VSAC's request for a $50 million moral obligation, I felt in my stomach the sinking dread many people have felt since the beginning of the financial crisis last September. The potential impact of H.166 is greater than legislators may currently realize. I have three areas of concern from which more questions will come.

1. Have guidelines for moral obligations limits been reviewed?

2. Has due diligence on VSAC's financial position been documented?

3. Is the General Assembly aware of breaking news of consequence in the variable rate municipal markets? 

I will cover each area by providing background information, followed by questions Vermonters should know as potential guarantors of VSAC's liabilities.

1. Have guidelines for moral obligations limits been reviewed?

From the bond analyst's view a moral obligation is referred to as “contingency debt.” Outstanding moral obligations sometimes factor into reviews of the State's bond rating. A September 2008 report to the Capital Debt Affordability Advisory Committee (CDAAC) recommends a policy approach to moral obligations and a procedure for setting limits to this kind of debt.

…it is relevant for CDAAC to consider a policy approach toward quantifying and limiting the State’s exposure to this type of debt. Indeed, without some form of containment, it is possible that an ever-increasing moral obligation debt load could, over time, erode the State’s debt position.

Recently, the CDAAC appears to have been working on guidelines to restrain growth in moral obligations. From the report:

There have been discussions within CDAAC for a couple of years regarding the establishment of guidelines for limiting the amount of moral obligation debt that the State should authorize. In an accompanying chart, the State’s net tax-supported debt statement, consisting entirely of the State’s GO outstanding indebtedness, is presented, as of June 30, 2008, at $438.6 million. Using 225% of GO debt for establishing a limit of moral obligation debt, the State would have had approximately $134.1 million in additional moral obligation capacity. Using 200% of GO debt for establishing a limit of moral obligation debt, the State would have had approximately $24.5 million in additional capacity. It should also be emphasized that the date during the year that these computations occur are crucial to the results. For example, if the computations had been made about a week later, July 8, 2008, after the VMBB, which has no statutory limit on moral obligation commitment from the State, sold an additional $43.57 million in new bonds, then the outstanding moral obligation commitment that the State had outstanding would have been approximately $895.3 million. Therefore, at 225%, there would be $90.5 million in additional capacity available; at 200%, there would ($19.1) million in negative capacity – in other words, at 200%, the State could not comply with the administrative guideline.

At this point, CDAAC believes that a range of 200-225% is appropriate in determining the amount of moral obligation commitments that should be outstanding in comparison to the State’s general obligation debt. Since CDAAC is not recommending legislative action to codify any statutory limits on the incurrence of moral obligation debt, CDAAC will continuously monitor the developing size of moral obligation commitments and report the results.

The State has had preliminary discussions with the rating agencies regarding this approach. As a general matter, the agencies are pleased that Vermont is attempting to restrain the potential growth in this area. For example, some states have adversely affected their debt positions by supplying over the years too much moral obligation commitment. At the same time, it does not appear that the rating agencies will give the State an approval of the precise percentage to be employed; indeed, the level of potential exposure will likely have to become a decision that the State will need to make, in consultation with its financial advisor.

 As of June 30, 2008, the sum of the State's outstanding moral obligations was $852.7 million.

Questions to ask with a request for supporting documents:

• What is the contingency debt position in outstanding moral obligations today?

• Has a policy approach been been applied in the case of H.166? 

• If CDAAC calculates a limits to moral obligations using the 200% to 225% formula, what is the remaining capacity for State moral obligations? 

• How does the State prioritize requests for moral obligations? 

• How will ratings agencies respond to a moral obligation for VSAC bonds as versus bonds from other State agencies? 

• If VSAC comes back to legislature sometime in the future equesting appropriations, what will happen to the good faith invested in other State moral obligations if the General Assembly does not fulfill the moral obligation granted to VSAC? 

• Is it legally possible for VSAC's creditors to demand payment from the State by virtue of moral obligation legislation?

  
  

2. Has due diligence on VSAC's financial position been documented?

• In mid-August, VSAC was paying $3 million annually for investment banking fees related to auction-rate securities.

• In mid-November VSAC still held $1.7 billion in failed ARS securities.

• On February 2^nd,, Moody's Investor's Services downgraded 31 classes of VSAC bonds from Prime 1 Aa3 to Prime 2 Baa1. The affected bonds represent higher risk to investors as well as a higher cost of capital for VSAC. The downgraded rating raises interest rates for VSAC. These interest rates are then passed on to borrowers.

   

• On February 4th, VSAC requests a State moral obligation.

• On February 13, Bloomberg reports VSAC's interest rates reset to 18%.

Yesterday, $27.5 million of federally taxable student loan debt issued by Vermont's Student Assistance Corp. and insured by Ambac Financial Group Inc. reset at 18 percent, up from 5 percent as of Jan. 15. Ambac was the first bond insurer to lose its AAA credit rating.

Local governments are obliged to pay the high rates until either the auctions start attracting more buyers or they modify the bonds to some other kind of variable-rate debt or a fixed interest rate. Bankers and borrowers have been working on conversion plans for several weeks.

Questions to ask with a request for supporting documents:

• How much risk is associated with a Baa1 rating? 

• How much capital has VSAC raised without a moral obligation since May? 

• What happens to the $1.7 billion failed ARS securities? 

• What interest rate will VSAC charge students for loans? 

• What does a snapshot of VSAC's financial revenue, assets and expenses look like today? 

• What does cash flow look like over the last 6 months? 

• How much does VSAC pay in investment banking fees and interest expenses at this time? 

• What is the risk assessment of a State moral obligation for VSAC? 

• Will a moral obligation backing VSAC's Baa1 rating be detrimental to Vermont's triple A rating? 

• If the State cannot determine adequate, material information regarding risk, should the General Assembly request an independent evaluation of internal finances and risk management at VSAC? 

   

3. Is the General Assembly aware of breaking news in the variable rate municipal markets?

The last twelve months have seen unprecedented events in the bond markets. Mundane liquidity markets have frozen. Bond insurers have requested bailout money and have been denied. As an issuer of bonds in the municipal market, VSAC should be aware of breaking news that is detrimental to lending capabilities. VSAC should be providing material information to legislators in full disclosure of risk associated with the request for a moral obligation.

Timeline of developing news

 

• February 3^rd. The Securities Industry and Financial Markets Association (SIFMA) sends letters to House Financial Services and Senate Banking requesting assistance in the municipal bond market.

  •  

    • SIFMA raises significant concerns about market liquidity and oversupply of bond offerings in the municipal market. 

    • SIFMA specifically mentions the impact to student lending authorities along with state and local governments.

       

• February 4^th. VSAC requests a $50 million moral obligation. 

• February 6^th. SIFMA sends versions of the same letters to Treasury Secretary Giethner and Fed Chair Bernanke. From SIFMA's letter:

The municipal bond market is experiencing a significantly low level of liquidity. State and local issuers are facing a critical need for reliable long-term credit enhancement, making it difficult to bring issues to market. The municipal securities market is also facing a serious dislocation between supply and demand. Municipalities are finding that even full faith and credit general obligation bonds cannot find investors. In some instances … cities and states have been forced to replace their variable rate municipal securities with more expensive, long-term, fixed-rate debt. … In other cases, municipal issuers have simply been unable to find buyers in the short and long-term markets for their debt issues.

The current conditions in the municipal market have severely limited the capital available to build roads, bridges, schools and other necessary infrastructure. We ask you to consider the following options to restore liquidity, adequately address the need for reliable long-term credit enhancement, and resolve the serious dislocation between supply and demand in the municipal bond market:

• February 10th. Treasury Secretary Giethner denies Ambac Assurance Corporation's request for capital infusion to prop up municipal bond underwriting. Ambac, VSAC's bond underwriter, had requested $1.5 billion. Bond issuers in municipal markets are unable to insure bond offerings. 

   

Questions to ask with a request for supporting documents:

• WasVSAC unaware of material information and breaking news in the bond markets? If so, why? 

• Has VSAC requested a need for a moral obligation to the General Assembly without providing material information? 

• Did VSAC purposely withhold material information. 

• How will VSAC raise capital given liquidity problems in the variable rate market? 

• What happens if VSAC cannot raise capital? 

• Does VSAC have a strategy to improve its bond rating? 

• What is the worst case scenario?

Conclusion

I would like to thank Senator Cummings, Senator McCormack and members of the Finance Committee for giving me this time to express my concerns. The kinds of questions I have provided should be asked so that the General Assembly can understand the issues that surround H.166. These questions, if asked and answered appropriately, will provide individual legislators enough information for an informed vote.

It has been implied by some that moral obligations are common, that historically none have been a cause of great concern. However, I have yet to hear anyone remind legislators what they most need to know: Past performance does not guarantee future results.

No two financial contracts are ever the same. We should remember that this is true of moral obligations. A moral $50 million obligation for VSAC cannot be compared to moral obligations the State has granted to VHFA, UVM, State colleges or VEDA. It is unwise to assume every moral obligation carries the same level of risk.

VSAC's request for a moral obligation comes from systemic problems in the global financial crisis. My interest in VSAC began in mid-November when I read a brief essay titled, “We are not an island; and VSAC is a sinking ship.” The overall message of the essay was clear: We cannot assume Vermont institutions will be insulated from the global financial crisis. We can't even assume that financial solutions that seemed to work six months ago are working right now.

This committee would do well to ask a question no one wants to ask: What happens in a worst case scenario? What happens if VSAC is stuck with $1.7 billion in auction rate securities it cannot sell? What happens if VSAC is unable to raise new capital in an illiquid market? What happens if student borrowers have to pay 18% or more for VSAC loans? What happens if VSAC defaults? What happens if VSAC comes to legislature requesting $50 million?

Considering the scale and reach of the global financial crisis, worst case scenario questions should be taken seriously. We are living in a time when there are no guarantees.

The unanswered questions of great concern to me as a Vermont taxpayer are those I raised at the beginning of testimony:

1. Have guidelines for moral obligations limits been reviewed?

2. Has due diligence on VSAC's financial position been documented?

3. Is the General Assembly aware of breaking news of consequence in the variable rate municipal markets?

Prudence requires due diligence before proceeding with a vote on H.166. It is my hope that this testimony will stimulate more discussion in the Senate than there was in the House. It is my hope that Senators will cast their votes fully informed of the risk associated with VSAC's request.

I believe that due diligence cannot be performed without an independent audit. Based on the research I have done since mid-November, I would not be surprised if an audit raises far more questions than I have asked today.

Once again, I would like to thank the Committee for this time today.

Nate Freeman

(Part two of Nate “mydog” Freeman’s consumer gadfly investigation into VSAC’s shrouded finances. I must say, I have never encountered an institution or entity in this state more impenetrable or more ensconced in a “don’t-ask-questions-if-you-know-what’s-good-for-ya” mystique. I think a lot of folks are watching this closely… – promoted by odum)

What this means:  Vermont taxpayers face an almost predictable tax bailout of VSAC for up to $50 million.