New Mexico has been forced to post $16 million in collateral because of a drop in value of the complex financial transactions at the heart of a federal pay-to-play investigation involving political contributions to Gov. Bill Richardson.

The unexpected need to post the money has the New Mexico Finance Authority questioning whether it received adequate guidance from outside advisers in assembling a complex transportation bond financing plan in 2004 for the Richardson administration.

Among the advisers was CDR Financial Products, a Beverly Hills, Calif.-based firm that contributed $110,000 to Richardson political committees in 2003-2005.

A federal grand jury is investigating whether political contributions by CDR and its chief executive, David Rubin, influenced the authority's decision to hire the firm. CDR earned nearly $1.5 million in fees for its work on state bond deals in 2004-2005. CDR and Richardson say there was no wrongdoing.

The collateral calls represent more than a financial inconvenience for the state; they mean fewer dollars available for highway construction projects.

The Finance Authority hasn't pointed a finger of blame yet at any of its advisers, but chief financial officer John Duff said in an interview with The Associated Press that "there certainly should have been some provisions for funding that collateral requirement," and that issue should have been addressed when the swaps were put together in 2004.

"We're not sure, to be honest, at this point who should have been responsible for spotting and addressing that issue," Duff said. "We don't think anybody at the Finance Authority internally could have had the depth and breadth of experience to make this assessment at that time. So we're talking about external advisers and just external parties generally."

At issue is a derivative known as an interest-rate swap. The authority, on behalf of the Transportation Department, entered into $420 million worth of swaps in 2004 with investment banks to help it obtain lower-cost financing. The swaps were part of a bond financing arrangement for $1.6 billion worth of highway and commuter rail projects planned by the Richardson administration.

CDR was hired by the authority in March 2004 to serve as an adviser on the swaps and several months later was selected to handle a reinvestment of bond proceeds held in escrow. The authority also had another financial adviser, Dallas-based First Southwest Company. Investment banks, including J.P. Morgan, helped market the bonds and some were parties in the swap agreements. About $11.4 million in fees were initially paid to underwriters, advisers, lawyers and other parties involved in the 2004 bonds and swaps, with about $1.2 million going to First Southwest, according to NMFA records.

According to Duff, the authority's advisers should have recommended a financial contingency for meeting collateral requirements of the swap agreements if market conditions triggered such a demand. Duff was not working for the authority when the swaps were approved, but he said it's also possible that financial advisers could have helped the authority structure the transactions differently, eliminating any obligation by the state to deposit collateral if market conditions changed. Some swaps only impose collateral requirements on one party, such as the bank or financial firm providing the swap.

"I can tell you, just generically, this is exactly the kind of responsibility normally assumed by financial advisers. The issue in my mind is there may have been other parties that also had a duty to inform us, to identify this issue and inform us about it," said Duff.

He acknowledged "this would have been something CDR, as a swap adviser, should have been qualified to address and should have addressed."

Michael Marz, vice chairman of First Southwest, declined to answer questions about its dealing with the Finance Authority. However, he said the firm has been told it isn't a target or subject of the federal investigation involving the New Mexico transportation bond deals.

To cover the collateral calls by investment banks, the state will use $30 million from a $200 million line of credit previously obtained from Bank of America to help finance highway projects until the next round of transportation bonds are issued, most likely next year. That approach leaves less money for road work, however, at a time when the state is financially strapped because of the national economic downturn and lower-than-expected energy revenues.

However, no road work will be delayed, according to S.U. Mahesh, a Transportation Department spokesman.

"Eventually we'll need that money for the GRIP projects but it will not have an immediate impact on the GRIP construction program," Mahesh said. The $1.6 billion transportation program is called GRIP — Gov. Richardson's Investment Partnership.

Under the swap agreements, the state makes payments to banks based on a fixed interest rate and in exchange receives payments from the banks that are tied to a variable interest rate, which is set in the marketplace. However, falling short-term interest rates have lowered the value of the swaps for the state. Currently, the money received by the state is less than what it's paying to the investment banks that are the swap providers.

"We would have to pay $112 million to cancel those swaps," said Duff.

However, the state has no plan to terminate the swap agreements and its situation — being "out of the money," as it's called in the financial industry — could reverse if interest rates change.

The transactions, Duff said, succeeded in limiting the state's debt service payments on its bonds.

"It has done what was expected. It produced savings in comparison to the fixed rates that would have been obtained if we'd done the whole thing as a fixed-rate issue," said Duff.




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