Wednesday, January 14, 2009

The Overture Center Board's losing crapshoot and what to do about it

Overture Center for the Arts
I took this photo in the Overture Center for the Arts in December before the holidays but didn't post it then. It didn't seem very festive, in fact a bit gloomy, despite the lobby's tower of holiday lights in the background. Now, the encroaching darkness, the ceiling pressing down as if burdened by a mountain of debt, and the solitary figure at the box office all seem to hint at the growing financial distress of Madison's lavish arts center on State Street. Even the lights are starting to seem like a waterfall of money being thrown away, pouring into a hole in the ground like a shower of coins.

I remember scratching my head several years ago when I read about the Overture board's all too imaginative refinancing scheme. As nearly as I could tell, it consisted of mortgaging the Overture Center and using the proceeds to invest in the stock market in hopes of earning enough to pay off the mortgage and also endow a fund for operating expenses. Or something like that. I remember thinking at the time that this could only work in a perfect, alternative universe of high investment returns and zero risk -- sort of like what Bernard Madoff was promising, come to think of it.)

Imagine a homeowner who borrows money on his house with the intention of taking it to Ho-Chunk Casino and winning enough to both pay off the mortgage and, say, send his kids to college. The inevitable failure of this plan and the ensuing bankruptcy would be greeted by contempt and ridicule. Yet, for some reason, when the Overture Development Corporation's cockamamie investment plan collapsed, they seemed to expect sympathy, instead of ridicule. In fact, they suggested city officials ought to pony up $12 million for them to pay off the mortgage and avoid bankruptcy. Mayor Dave Cieslewicz opposed the suggestion, rightly so.

Still, something has to be done if we don't want a white elephant on State Street that remains perpetually dark, a blight on the downtown. Here's my modest proposal: The three banks that hold the loans are hardly innocent victims. They presumably thought this was a perfectly legitimate thing to do with Jerry Frautschi's gift to the city. They also are part of an industry that has received the largest taxpayer bailout in U.S. history, aimed at helping them get out from under the bad assets they hold. Well, this is just another bad asset. Surely there enough in those billions for a bit to trickle down to Madison, Wisconsin, and let them write off the Overture Center loan.


astrogerbil said...

Part of the board's culpability started with the original trust: it assumed an annual rate of return of around 8 to 8.5%. They must have gotten there by figuring out what rate of return would be needed to generate the cash flow they wanted, and then confidently asserting that's what they'd get. I remember looking at the number and wondering 'what universe are they living in?'. That's not the kind of conservative investing a public project is supposed to engage in! You're right, they're Madoff numbers! (Well, at least they didn't assume 12%!)

Richard Castonguay said...
This comment has been removed by the author.
Anonymous said...

As a visitor to Madison a couple of years ago I thought the cenetr was such an asset to the the city of Madison. It would be such a shame if it were lost.

I agree, not such a great idea to invest the way they did. Must of came from desperation or ignorance.


Boston Ma

Madison Guy said...

Astrogerbil, thanks for the numbers. Yes, the 8.0-8.5% assumed rate of return did seem crazy. I wondered at the time why the banks went along with it, but that was back when I naively assumed that banks were in the business of trying to make good loans.

Tom Bozzo said...

The MCAD trust's return target was 9% originally (ca. 1999), then lowered to 8% with the refinancing. In the stock bubble era, "only" 9% may have looked like the height of conservatism...

In any event, the trust did in fact have some of their money with Madoff via the Fairfield Sentry fund, which ironically was one of their highest-flying holdings when I looked at their investments for Isthmus early last year.