Creative Commons/miss_millions

The Asian Art Museum of San Francisco

The Asian Art Museum of San Francisco's already-complicated financial situation has a new wrinkle as the institution fights to stay solvent.

According to two strongly worded letters from City Attorney Dennis Herrera, the Asian Art Museum Foundation, the nonprofit that runs the museum alongside the city, was at the mercy of two scourges of the modern economy: It saw its bond ratings fall thanks to its insurer MBIA's investing in mortgage-backed securities, and it got bad advice from a banking giant, JPMorgan Chase, which stood to profit from the museum's losses.

According to the museum and Herrera, the Asian Art Museum Foundation, which renegotiated a $120 million debt in 2005, got its bond rating downgraded in 2008 thanks to MBIA's toxic assets. It then purchased a letter of credit from JP Morgan, which handles much of the museum's finances, to allow the bonds to trade at AAA levels — but that letter expires on Dec. 21.

If no agreement to continue the letter is reached, the museum nonprofit would have to pay back that debt in five years, instead of by 2034 as previously agreed. It could very well mean bankruptcy, as the foundation's assets are around $70 million in total. (The museum's collection and the museum building are owned by the city of San Francisco and are therefore safe from creditors.)

The city attorney asserts that MBIA, which manages the museum foundation's assets, was responsible for the downgrade. In a letter addressed to the company, he writes that MBIA's "irresponsible investment" in mortgage-backed securities was to blame — and says that MBIA "pocketed" $5 million in fees for insuring the 2005 restructuring.

Herrera says the Foundation estimates this improper exposure cost the Asian Art Museum $20 million and forced it to pony up another $20 million in collateral. "We urge you to immediately dedicate your resources and attention to solving this issue as soon as possible," writes Herrera. The "or else" comes a few paragraphs later, as he instructs MBIA to preserve all documents, should "negotiations not prove fruitful."

MBIA spokesman Sam Singer said the company disputes the notion that it caused the museum's financial difficulties, pointing out that the de Young and the California Academy of Sciences are also insured by MBIA and are not experiencing similar problems. "This is a massive simplification, but the Asian Art Museum owes $120 million in bonds and the impact of MBIA's downgraded rating is probably under $5 million, over the course of 30 years," he said. "It needs to manage its finances differently."

The museum's 2009 tax return shows an operating loss of $10 million, after the previous year's loss of $5 million. The institution's net assets tumbled by $23 million, although a spokesman disputes reports that the museum's attendance and gifts have been off. 

In a second letter, addressed to JPMorgan Chase, Herrera lays out some ways in which he claims the bank had "conflicting roles" in the Foundation's financial business and has "handsomely profited" from its work. 

According to Herrera, JPMorgan Chase advised the AAMF to renegotiate its bonds in 2005, from fixed rate to variable rate — the bank acting as "the primary architect" of the new debt structure — and then made money by selling the institution a letter of credit when the toxic assets were downgraded.

In other words, it "acted both as the agent that advised on the Foundation's investments, which declined significantly, as well as the agent that plans to seize those very investments as collateral." 

The letter ends with another barely veiled threat: "If JPMorgan continues down its current unreasonable path, the City will be forced to take steps to protect the Museum and the public."

JP Morgan Chase declined to comment specifically on the letter. Both MBIA and JP Morgan said they hoped everything would work out. Time will tell if it does.