If school is a place to learn lessons, then the Butler School District should have learned several lessons last week when the board agreed to spend $5.7 million to get out of a complex financial bet, called a swaption.

Board members learned, or should have learned, that swaptions are very risky financial bets with big downside risks. They also should have learned that competitive bidding and truly independent financial advisers are critical when dealing with complicated financial matters.

Not that it eases the financial pain to taxpayers, but Butler is not alone in taking a beating after a swaption bet turned bad.

In March, Bloomberg Markets magazine wrote an in-depth article about swaption deals sold to school districts across Pennsylvania. In most cases, the article noted, the deals sounded to the school boards to be too good to be true. And in most cases they were.

The Bloomberg article profiled the Erie School District, which entered into a swaption deal in 2003 that provided an up-front payment of $785,000. That payment was similar to the $730,000 payment Butler received when it made a swaption bet.

Bloomberg's reporters revealed Erie's deal produced $60,000 for the school's financial adviser, $57,000 for the bond insurer and another $106,000 for lawyers and others.

The real winner in the deal was JPMorgan Chase, the investment bank that did the deal. JPMorgan, which decided how much each party in the deal was paid, kept $1 million for its own fee. Bloomberg's analysis concluded that if JPMorgan had been paid a more reasonable fee, the Erie deal would have netted an up-front payment of closer to $2 million.

Competitive bidding would have produced a better payment for the district.

Three years after entering the swaption deal, Erie officials saw that interest rates were not going the way that they had bet, and the board decided it was better to get out of the deal. To get out of the contract, the district agreed to pay JPMorgan $2.9 million.

Now, Butler school officials are paying $5.7 million to get out of its swaption mess.

Though swaptions have a legitimate place in sophisticated financial deals, they are highly risky — and difficult to understand for most people, including most school board members.

Bloomberg's research revealed that from 2003 through 2007, 15 school districts entered into swaption deals valued at $28 million. The school districts were paid $15 million — and the investment bankers, advisers and others took the remaining $13 million in fees.

Reviewing the school districts' swaption deals, Bloomberg columnist Joe Mysak wrote, "The swap market is no place for school districts to play." And noting that such deals were out of bounds for school districts until a few years ago when state legislators changed the law, Mysak asked, "How could this legislative body vote to turn the wolves loose on so many sheep?"

Asked to comment on the swaption crisis hitting school districts, Gov. Ed Rendell was quoted in the Bloomberg article, saying, "The school districts are getting fleeced."

If that's what has happened — just as some predicted it would — why did the Legislature change the law to allow it, and why did Rendell sign it?

An investigation into the lobbying efforts of Wall Street investment banks in Harrisburg might offer an explanation. And such an investigation should be undertaken, if it hasn't already begun.

So, Butler officials are not alone in having made a mistake. They made a bet on something they did not understand. They failed to ask enough questions and didn't invite competitive bidding. They also might have had bad advice.

A letter from the supposedly independent financial adviser helping Erie explained their swaption deal, saying, "The net swaption premium to the district was adjusted to reflect the forward-starting and option-adjusted nature of the swaption, a reasonable hedging spread in the LIBOR markets and a fee to JPMCB (JPMorgan Chase) reflective of its time and effort dedicated to the district as well as the inherent credit, operational and market underwriting hedging risk of the transaction.''

Did Butler's board get similar guidance? Did Butler's board understand it?

While there appears to be little doubt that JPMorgan and the district's financial adviser share much of the blame for the swaption debacle, the board cannot escape blame.

The swaption bet made by Butler has turned out to be a costly mistake, and one that will cost taxpayers dearly. The $5.7 million cost to get out of the swaption deal represents money that could have been used to pay teachers, buy books or maintain school buildings.

Even before the final chapter of the swaption story has been told, there are lessons to be learned from the experience at Butler and Erie. One lesson should be to avoid transactions that board members do not understand. Another lesson must be to insist on competitive bidding in all financial deals, such as bond underwriting. And, with competitive bidding, boards need sworn assurances that the independent advisers offering their guidance have no relationship whatsoever with the firm pitching the deal.

Swaption deals sold by creative Wall Street investment bankers have been a nightmare for many Pennsylvania school districts. It's already a sad, and costly, story. But it's also a story that is far from finished, in terms of financial and, possibly, legal implications.