Jack Wagner’s Mission to Rescue Pennsylvania from the $17.4 Billion Derivatives Mess

The Pennsylvania Department of Community and Economic Development (DCED) reported that a shocking 21% of all school districts — or 108 of 500 school districts in the state — and 105 local government agencies in the commonwealth of Pennsylvania had a total of $17.4 billion (notional amounts) in interest-rate swaps tied to public debt between October 2003 and September 2012. No one showed more alarm about the magnitude and spread of these swap contracts than Jack Wagner, the former Auditor General (2005–2009) of the State of Pennsylvania. Unlike any other official, Wagner distinguished himself by taking keen interest in public schools’ use and misuse of financial derivatives, which consisted almost totally of interest-rate-exchange (swap) contracts. The public outcry about swap-related losses surfaced after Wagner’s office discovered how swap pushers from big banks had exploited public school officials’ lack of knowledge about swaps and sold to them large numbers of these complex contracts. In one of his testimonies, Wagner asked the question, “Do the local elected officials who wrote to enter into these transactions really understand them?”…