By Joel Thurtell
The arcane name for the financial parasites compounding California school debt is “Capital Appreciation Bond.”
The California Senate’s Commerce and Finance Committee will consider a ban on CABs at its May 9 meeting.
Let’s hope the California Legislature scraps this abomination. In Michigan 19 years ago, we found that CABs are good only for the handful of bond underwriters, bond attorneys and financial advisers who promote them to enrich themselves at public expense.
A better monicker for CABs would be “Capital Arithmetic Bond.”
Simple arithmetic is all it takes to understand why CABs are a bad deal for borrowers.
One way to look at this travesty is from the perspective of someone buying a house.
Typically, people don’t pay cash. They borrow. The loan is called a mortgage.
Interest rates on home loans are pretty low right now. I’ve seen rates as low as 2.8 percent. Rates of 4-5 percent might be considered typical. Certainly, in these days, a home loan at 7 percent would be considered high.
To be conservative, though, let’s pretend that we’re buying a house with a 7 percent loan.
How much interest would we pay, compared to principal?
If you borrowed $100,000 to buy a house, using a conventional mortgage at 7 percent interest, the proportion of interest to principal would vary based on the length of the loan.
Here’s how interest as a percentage of principal would look over different time periods:
Mortgage years Interest as percentage of principal
15 years 62 percent
20 years 86 percent
25 years 112 percent
30 years 139 percent
A 15-year mortgage would have the house paid off with interest of $62,000 on a $100,000 house — actually less than principal.
In Michigan 19 years ago, I found school districts paying interest that amounted to 200, 300, even 575 percent of principal.
In California right now, the Poway School District near San Diego has bonds with $100 million of principal.
The interest?
$1 billion.
The interest rate for the taxpayers of Poway?
1000 percent.
Simple arithmetic: CABs are a bad deal for schools.
