A few weeks ago, I wrote about how big banks refused to renegotiate deceptive, Greek-style interest rate swaps with local governments throughout the US. Such swaps cost local governments approximately $29 billion a year when local governments are laying off badly needed public employees and cut services.
After a major victory in Los Angeles, a mass social movement has been launched all over the country to get municipalities out of these agreements, using the power of moving local government's money. Now the fight moves on to Oakland and other cities throughout the country.
In 1998, the Oakland Joint Powers Financing Authority issued $187.5 million in bonds with a variable interest rate. A variable interest rate can go up or down depending upon the interest rate set by the Fed, which can be tricky for governments trying to do long-term planning.
So, Goldman Sachs offered Oakland a gamble: if the Oakland paid Goldman a fixed 5.68% interest rate, the bank would pay back the fluctuating variable rate to the city to cover the interest payments on the bond. This gave the Oakland city government security because whether interest rates went up or down they would pay the same interest rate
Fast-forward almost ten years later after the banks crashed the economy, the Federal Reserve cut interest rates to zero as part of the bailout to give banks access to cheap money. The profiting that big banks burrowing money from the Federal Reserve is in itself a scandal, as Matt Taibbi described:
Fed became not just a source of emergency borrowing that enabled Goldman and Morgan Stanley to stave off disaster -- it became a source of long-term guaranteed income. Borrowing at zero percent interest, banks like Goldman now had virtually infinite ways to make money. In one of the most common maneuvers, they simply took the money they borrowed from the government at zero percent and lent it back to the government by buying Treasury bills that paid interest of three or four percent. It was basically a license to print money -- no different than attaching an ATM to the side of the Federal Reserve.
Goldman further profited from lowered interest rates because the variable rate that Goldman had to pay dropped down to 0.15 percent. But Goldman Sachs is still forcing the taxpayers of Oakland to pay 5.68 percent, and pocketing the $5.2 million difference as profit.
To add insult to injury, Goldman Sachs isn't paying interest on the bond anymore. The City of Oakland actually paid off the bond back in 2005. Since Goldman Sachs is no longer paying the interest payment they had swapped with the City of Oakland, Goldman is basically making money without providing any service whatsoever.
However Oakland is expected to keep paying the contract until 2021 even though they are paying for nothing. You thought credit-card fine print was tricky; you haven't seen anything until you've seen interest rate swap language.
Goldman Sachs is profiting off of the city of Oakland to the tune of $5.2 million. The dollar budget figure is significant because Oakland is facing a $4.8 million budget deficit. This $5.2 million could plug the entire remaining hole in the city's budget, eliminating the need for further layoffs and cuts to services.
Goldman will not let Oakland taxpayers out of the deal unless they pay nearly $19 million in penalties. Otherwise, the city will have to keep paying millions and millions each year until 2021.
These contracts are even more outrageous because its not exactly clear that they are legal; attorneys general are investigating them in several states. Questions are starting to be raised about how exactly Goldman Sachs was able to lure so many city governments around the country into these dubious, opaque deals.
Gretchen Morgenson, writing in the New York Times this past weekend, pointed out how bad these deals were:
Almost all tax-exempt debt is structured so that after 10 years, it can be called or retired by the city, school district or highway authority that floated it. But by locking in the swap for 30 years, the municipality or school district is essentially giving up the option to call its debt and issue lower-cost bonds, without penalty, if interest rates have declined.
Imagine a homeowner who has a mortgage allowing her to refinance without a penalty if interest rates drop, as many do. Then she inexplicably agrees to give up that opportunity and not be compensated for doing so. Well, some towns did exactly that when they signed derivatives contracts that locked them in for 30 years.
So why in the world would these municipalities agree to such contracts when bonds are the much preferred method? Perhaps because the swap adviser advising municipalities to enter into these deals was also on the take. As finance expert Andy Katolay stated in the New York Times "The basic problem is the swap adviser gets paid only if there is a transaction -- an unbelievable conflict of interest," he said. "It's the adviser who is supposed to protect you, but the swap adviser has a vested interest in seeing something happen."
So ideally, you think Goldman Sachs maybe would be willing to help city governments at the very least to avoid criminal prosecution. Or maybe just to return the favor that taxpayers have done Goldman Sachs. After all, Goldman Sachs received tens of billions of taxpayer dollars through the federal government when it was having a hard time. Maybe Goldman could share the love a little bit after all they paid $16.7 in bonuses.
Wrong, this is Goldman Sachs, not your Grandma. The only way we can get Goldman to change is if we force them to change.
Last week, the Los Angeles City Council voted to move its $28.9 billion of operating and pension funds out of banks that refused to do business in a socially responsible way. They did this by creating new standards that taxpayer money would only be only invested in banks that don't engage in predatory lending, help struggling homeowners, invest in programs that create jobs and don't engage in these dangerous manipulative practices of interest rate swaps.
This means that big banks will be forced to renegotiate these swaps that are costing LA $19 million a year or lose out on $28.9 billion dollars of the city's business. The banks are so scared that one anonymous swap dealer told the American Banker that such campaigns were "unprecedented" and "ridiculous."
Local activists can win these campaigns. Big banks don't have as much clout in Des Moines as they do in Washington. City councilmen are much more sensitive to the needs of local communities. City Council elections are significantly easier to influence through community organizing, so city council members tend to be more responsive than members of Congress who needs millions of dollars to win an election.
There are thousands of city and local government that spend hundreds of billions of dollars each year that are processed through banks. These governments have incredible financial leverage to force big banks to change their practices. With a well-organized social movement, we could change the ways banks do business on Main Street.
The Move Your Money Campaign is the first battle in a long battle to change the way our economy works. And it is one that we can win.