Mark S. Ferber, who was recently forced to dissolve a secret contract to generate swaps business in New England for Merrill Lynch & Co., tried in 1991 to market a swap in Massachusetts that officials there now believe would have been a major flop for the state.
In trying to sell the swap to Massachusetts officials, who ultimately rejected the plan, Ferber argued that the state did not have enough money to meet a $120 million debt service payment due on March 1, 1991, for the Massachusetts Bay Transportation Authority.
He suggested, according to officials involved in the negotiations, that the state dip into the authority's commercial paper program with a $120 million sale and enter into a floating-to-fixed-rate swap. The plan was to use Merrill Lynch & Co. as a swap counterparty and Lazard Freres & Co., Ferber's employer at the time, as financial adviser.
"This deal was unnecessary and would have been disastrous for the state," a debt manager for the state said this week. "We had enough money for the [authority] payment. This was an example of just doing a deal for the sake of doing a deal."
State officials say Ferber's idea came at a time when Massachusetts' credit rating was the lowest in the nation at triple-B, and could not have withstood another foray into the credit markets to raise money for the swap plan.
Moreover, Massachusetts made the $120 million authority payment on time and without the need for a special borrowing in the credit markets.
State officials say they particularly resented Ferber's swap marketing effort because it came at a time when Massachusetts finances were at their lowest since the Great Depression.
"We were in a cash crisis situation, and we thought it was important that we deal with that and not just paper the problem over," said a member of the state treasurer's office. "This deal solved none of the state's problems."
In addition, state officials say, Ferber told senior staff members in the newly elected administration of Gov. William F. Weld that other officials had already approved the transaction.
But in recent interviews, members of the state's Treasury, the Department of Administration and Finance, and the governor's office dismissed the deal as "nothing more than a glorified shell game" that had no administration support.
According to an administration official, who spoke on the condition of anonymity, Ferber met separately with former state Secretary of Administration Finance Peter Nessen; a representative of Treasurer Joseph D. Malone's office; Weld's former chief of staff, Mark Robinson; former Secretary of Transportation Richard Taylor; and members of the Massachusetts Bay Transportation Authority staff about the proposed financing.
Several officials said Ferber tried to play the officials off against one another by telling each of them that the others had actually signed off on the swap.
"We were advised about the possibility that this deal would get done and had been approved by the governor's people," the Treasury official said. "But after we did some technical research into it, we found it was saving nothing and we withdrew any support."
Ferber, whose secret swap contract with Merrill Lynch forced him to leave the public finance business under a cloud earlier this year, could not be reached for comment this week.
Concern about the transaction came from several different branches of the Weld Administration.
"You have to understand, at that time we were just concerned about keeping the state's finances from falling apart," said Nessen, who was secretary of administration and finance in 1991, in a telephone interview this week. "Since the administration was in transition, and we did not feel we had all the information on the sale, we decided against supporting the sale."
According to another Weld official, "We didn't even know where the pencils were in the offices yet."
Yet Ferber's sales job on the swap was so convincing that the board of directors of the Transportation Authority was preparing to approve it right up until the last moment, when the state intervened to stop a final vote on the plan.
A former member of the authority staff said that Taylor, the transportation secretary, was called out of the public authority board meeting and told of the state's position. When he returned to the meeting, the board adjourned into private session and the matter was never discussed again in a public session.
"They were in session and ready to give the green light," said a senior Weld official. "After the state said it was not behind it, the board rejected the proposal."
Over a three-year period, Ferber and Merrill Lynch worked together on swaps for issuers including Boston, the New England Medical Center, and Massachusetts.
Ferber was in an exceptionally good position to gain business in the Massachusetts State House. After attending Northwestern Law School in Chicago, Ferber served as the senior staff member for William F. Bulger, the president of the Massachusetts Senate. He left Bulger's staff in 1981, and began work as an investment banker at Kidder, Peabody & Co. in Boston.
Since then, Ferber has worked in the public finance departments at First Boston Corp., Lazard Freres, and finally at First Albany Corp. He was most recently vice chairman at First Albany.
Ferber was dismissed from First Albany after the undisclosed contract surfaced with Merrill Lynch. In that contract, which existed between 1989 and 1992, Ferber marketed and helped structure complicated interest rate swap transactions for several issuers.
The contract paid Ferber and his staff $1 million per year. One provision of the deal said that neither Ferber nor Merrill Lynch could disclose the terms of the retainer agreement.
State Attorney General Scott Harshbarger, the Massachusetts inspector general, and the U.S. attorney's office are all reported to be conducting investigations into Ferber's various business relationships.