In Louisiana, Treasurer John Neely Kennedy, who serves as bond commission chairman, warned before the Merrill Lynch plan passed in March 2006 that the swaps could backfire. There was so much pressure to overhaul the 37-year-old stadium for the Saints that he said he felt as if he had "a gun to my head."
The NFL franchise did stay put in the arena, known since October as the Mercedes-Benz Superdome. Not only that, the Saints acquired quarterback Drew Brees, won the Super Bowl in 2010 and will play the San Francisco 49ers in the second round of this year's playoffs on Jan. 14.
Still, the costs to the state are "outrageously high," Brooks said. That the auction-rate deal was done in part to satisfy team owner Tom Benson made it all the more imprudent, said Robert Baade, a professor at Lake Forest College near Chicago and co-author of a 2006 study that found subsidizing the Saints after Katrina wouldn't make economic sense.
The Bayou State's costs spiraled out of control after banks, reeling from the credit crisis, stopped acting as buyers of last resort at auctions of floating-rate securities.
Rates on the debt surged, going as high as 20 percent. The swaps didn't cover the difference. Investors shunned the market. "If the banks were cardiologists, they would have been sued and thrown in jail years ago for what they have done," Brooks said.
The Louisiana Stadium and Exposition District did sue, claiming bond-insurer Financial Guaranty Insurance Co., a unit of New York-based FGIC Corp., sold the agency protection that became worthless and that Merrill Lynch fraudulently failed to tell officials everything they needed to know.
Charles "Buddy" Roemer, Louisiana governor from 1988 to 1992, said he doesn't buy the contention that Tim Coulon, who was the head of the stadium agency at the time of the deal and urged the bond commission to approve it, and the commissioners didn't have enough information. "I don't think ignorance is a good excuse here," Roemer said. "I don't think unsophistication is a good excuse. All these entities pay large sums for legal and financial advice."
In May 2010, U.S. District Judge Loretta Preska dismissed the claims against FGIC. The state has appealed. Officials with FGIC didn't respond to telephone calls seeking comment.
Court Action
Preska tossed out seven counts against Merrill Lynch, now a subsidiary of Charlotte, North Carolina-based Bank of America Corp., letting stand accusations of breach of fiduciary duty, intentional and negligent misrepresentation and fraud. The bank denied the claims in its response. "LSED and its sophisticated advisers fully understood the risks of the bonds and knowingly accepted those risks in exchange for a lower interest rate," said William Halldin, a spokesman for the bank, in an e-mail.
Coulon, who left the agency in 2009, declined to be interviewed, saying in an e-mail that he was "proud of the work and creativity" that went into the Superdome project.