SAN FRANCISCO — The city attorney of San Francisco has sent a shot across the bow of both JPMorgan Chase & Co. and MBIA in the form of threatening letters over their involvement in the Asian Art Museum’s financial crisis.
The Asian Art Museum of San Francisco’s foundation, which raises money for the institution, has a letter of credit from JPMorgan that backs $120 million of outstanding variable-rate revenue bonds and is set to expire on Dec. 21.
The bank has told the city the LOC will not be extended, which could set the foundation on a path to bankruptcy.
“If JPMorgan continues down its current unreasonable path, the city will be forced to take steps to protect the museum and the public,” San Francisco city attorney Dennis Herrera said in a letter Tuesday to James Dimon, chairman and chief executive of JPMorgan Chase.
“JPMorgan should reconsider its decision and should extend the letter of credit and otherwise refrain from taking any steps that could have an adverse financial impact on the foundation,” Herrera said.
The bank did not respond to repeated requests for comment.
If the letter of credit expires, JPMorgan would take $20 million of collateral and the foundation would be forced to pay back the bonds within five years, according to the city and the foundation.
Herrera also said JPMorgan has had conflicting roles in the foundation’s finances, saying its decision not to extend the LOC and to potentially seize the $20 million in collateral “raises serious potential issues of self-dealing and unfair business practices.”
The bank, the letter noted, was the primary architect of the current financing and serves or has served as the foundation’s underwriter, remarketing agent, swap counterparty, investment portfolio manager. and letter-of-credit provider.
Herrera said the bank has reaped at least $13 million from the foundation in fees and other charges related to its roles.
The bonds originally were 30-year fixed-rate bonds, which the city attorney said JPMorgan advised be converted to variable-rate bonds.
“I am also aware that JPMorgan has been the subject of numerous and ongoing investigations by the United States Securities and Exchange Commission and the Justice Department involving its banking practices,” Herrera said. “Given the various roles played by JPMorgan, my office may need to learn more.”
In both letters, the city attorney told the insurer and bank to treat the letter as a formal request to preserve all documents related to the bond transactions.
“The Asian Art Museum is delighted to have the city attorney and city to try to drive the parties together to get a resolution,” said Tim Hallman, a spokesman for the museum and foundation. “We had no role in crafting these letters, this is something the city attorney did on his own.”
The museum is a charitable trust department of the city.
San Francisco issued $40 million of tax-supported general obligation bonds in 2000 to turn the old public library into the museum.
If the letter is not renewed, the museum’s financial future is murky.
The foundation’s operating revenues totaled $27.7 million in fiscal 2009, with $36.7 million of monthly liquidity. Its cash and investments totaled $86.2 million.
Moody’s Investors Service last month placed the foundation’s underlying Baa1 rating on watch list for a possible downgrade.
Moody’s said it is concerned about the foundation’s liquidity and operating performance amid the looming expiration of the LOC.
The foundation has retained bankruptcy lawyer Bruce Bennett, a partner in the Los Angeles firm Hennigan, Bennett & Dorman. He represented Orange County during its 1994 bankruptcy.
The $120 million of bonds are also hedged by an interest rate swap with JPMorgan that is insured by MBIA.
The insurer’s downgrade during the financial crisis to a level below Aa3 resulted in the foundation posting the $20 million in collateral with the bank.
In a letter sent on Tuesday to MBIA CEO Jay Brown, Herrera blamed the insurer’s downgrade for the museum’s financial mess. He said as a direct result of the downgrade, the foundation was forced to seek the letter of credit from JPMorgan.
MBIA now operates its public finance insurer as National Public Finance Guarantee.
Herrera added that MBIA “pocketed” $5 million to issue the bond insurance policy.
“I am concerned that but for MBIA’s responsibility for its downgrading, the foundation would have the resources to service the bonds,” Herrera said. “I find it particularly disturbing that MBIA insured the foundation’s payment obligation under the swap agreement in 2005 but that the foundation was relieved of its obligation, with the consent of JPMorgan, when the bonds were restructured in 2009.”
When asked if the city attorney has any plans to sue MBIA or JPMorgan, spokesman Jack Song said Herrera is “reviewing the matter and has encouraged the parties to present credible solutions to the financial challenges facing the foundation.”
In a response letter sent to Herrera from lawyer Tobias Keller at Jones Day, MBIA disputed Herrera’s allegations and laid much of the museum’s financial problems at the feet of JPMorgan and the city itself.
“There is no basis for your suggestion that MBIA made any promise — implied or otherwise — that its credit rating would remain unchanged for the duration of the period the bonds remained outstanding and insured,” Keller said in a letter dated Wednesday.
The letter also said the foundation had interest rates in August 2009 at or lower than before the downgrade and that it could have terminated the swap then for roughly $2.5 million, which now would cost around $18.5 million.
MBIA also noted that other San Francisco museums with debt insured by MBIA — the de Young Museum and the California Academy of Sciences — worked through the downgrade and the recession without a crisis.
Keller alleged that the city has not met its obligation in the city charter to allocate enough money to the museum. He said the city appropriations have covered less than one-half of the museum’s annual operating expenses, which has left the foundation without enough funds to service its bond obligations.
MBIA said it has urged JPMorgan to extend the letter of credit or agree to a “standstill” to allow for a plan that would avoid the liquidation of the foundation’s assets.
“JPMorgan’s stance has precipitated the immediate crisis,” MBIA said.
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Corrected December 6, 2010 at 6:57AM: The swap is no longer insured by MBIA. The insurance was dropped when the JPMorgan issued its letter of credit to the museum.