Wall Street got bailed out. Cities got sold out. Federal policies keeping interest rates low are resulting in extracting wealth from cities and transferring it to Wall Street.
We blogged earlier about how traders from JP Morgan Chase and Goldman Sachs descended on European cities such as Casino, Italy and even nunneries selling them interest rate swaps. Interest rate swaps were also responsible for bankrupting Jefferson County, the county seat of Birmingham, Alabama. Now the same big banks are bankrupting California cities. Stockton, San Bernadino and Mammoth Lakes have already gone down. Oakland is fighting Goldman for its very life.
But what does this have to do with the LIBOR scandal, you say? A lot, it turns out. LIBOR stands for the London Interbank Offered Rate, a benchmark that most other interest rates are tied to including interest rate swaps, the very derivative financial instruments that are now bankrupting California cities. The LIBOR scandal has failed to attract the interest of many Americans because it’s so “over there” in London. What does that have to do with us here in the US? The same interest rate swaps that JP Morgan Chase sold to nunneries in Europe, they’ve sold to Stockton and San Bernadino and Oakland and many other US cities, school districts, hospitals and perhaps even to a few US nunneries.
It has recently come to light that the LIBOR has been fraudulently manipulated by London based Barclays bank and possibly quite a few others. CEO of Barclays, Bob Diamond, has been forced to resign and Barclays has had to pay a $456 million penalty. Diamond (unlike his US counterpart, Jamey Dimon, of JP Morgan Chase who sports Presidential cuff links) has had to eat humble pie in front of the English Parliament.
What this means is that interest rates for credit cards, mortgages, student loans and almost every other kind of loan imaginable including interest rate swaps have been fraudulently set for years. A trader at Barclays petitioned a submitter, whose job it is to report accurately on the interest rate, to lower the LIBOR on a certain day so that he could make a killing on his Credit Default Swap, a bet that the LIBOR would go down on that day. When it did and the trader cashed out, he phoned up the submitter and said, “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.”
It’s too late for Stockton, now that it’s surpassed Birmingham as the nation’s largest municipal bankruptcy, and for San Bernadino, but Oakland is fighting back demanding that Goldman terminate the interest rate swap deal without penalties. Recall that Casino, Italy took JP Morgan Chase to court and eventually won a settlement of a half million euros. Oakland entered into an interest rate swap with Goldman in 1997. They convinced Oakland officials that it would protect taxpayers against the possibility that interest rates would rise on variable rate bonds that the city planned to issue the next year. Oakland’s deal with Goldman Sachs converted floating rates on $187 million of bond debt into a fixed 5.6 percent.
If the interest rate tied to the benchmark LIBOR went below 5.6%, then Oakland had to pay Goldman, and if it went above 5.6% Goldman had to pay Oakland. Since then, however, the Federal Reserve has kept interest rates near zero so Goldman had made out like a bandit and Oakland has had to pay through the nose taking money away from teachers, firefighters, policemen and garbage workers and funneling it to Goldman. This collapse in city finances is bankrupting the city. If rates stay artificially depressed due to the Federal Reserve’s decisions, Oakland will owe Goldman Sachs another $20 million between now and 2021. That’s on top of the $26 million the city has already paid.
In all fairness Goldman would say that nobody forced the city of Oakland to enter into the interest rate swap. Oakland made a bet that interest rates would rise and it lost. It’s as simple as that. However, Oakland wasn’t counting on manipulation of interest rates by the Federal Reserve and by the LIBOR so the deal sucks all the way around. In fact it stinks to high heaven. Leaders of some of Oakland’s largest churches are uniting with community organizers, Decolonize Oakland, and Occupy Oakland activists to focus on how “predatory” banks are draining Oakland’s budget and causing cuts to vital city services. Oakland can get out of the deal with Goldman by paying a $16 million penalty, but that seems unfair to Oakland’s leaders. They say that Goldman got bailed out by the TARP while government money has failed to bail out Oakland. Wall Street got bailed out. Cities got sold out. Federal policies keeping interest rates low are resulting in extracting wealth from cities and transferring it to Wall Street.
On top of that the state of California is taking monies back from cities’ Redevelopment Agencies to fund its own budget deficits. A controversial new law terminates all redevelopment agencies and authorizes the seizure of $1.7 billion of their property tax revenue to alleviate the state’s own budget deficit.
Oakland, however, uses redevelopment funds to cover at least some portion of city workers’ pay. Mayors and city councilmembers who oversee redevelopment projects may receive part of their salary from the agency. Funding police services is also consistent with redevelopment law as long as those services are used to mitigate gang activity, graffiti abatement and other causes of community blight. The Oakland Redevelopment Agency has funded full time police officers for five years. With the state clawing back Redevelopment Agency funds and property taxes, city workers including police officers are likely to be laid off.
What’s happening in Oakland and many other US cities is similar to what’s happening in Greece and all over the world. This is from Occupy Oakland Media:
“The banking deception hits close to home, as Oakland and San Francisco pay millions of extra dollars annually in inflated interest payments to Goldman Sachs and JP Morgan while cutting funding for education, after-school programs, healthcare and infrastructure. Oakland will pay nearly half the amount of its budget deficit to private banks over the next few years because of high interest rate obligations stemming from interest-rate swaps with banks such as Goldman Sachs. This is tantamount to redistribution of wealth from the poorest people in Oakland who will give up education and healthcare to millionaire bankers.
“This has been happening in states all over the country says economist Michael Hudson, “Because what’s happening in Greece is a dress rehearsal for what’s going on in the United States. … What’s happening in Greece in the last week is exactly what’s happened in Minnesota with the close-down of government. And the demands of privatization – thatGreece sell off its roads, its land, its port authority, its water and sewer – is just what Illinois’s been doing, what Chicago’s been doing, what Minnesota’s been told to do, and what American cities are trying to do.
“What if the United States had bailed out the states instead of the multi-national banks? We could have retained funding for education, infrastructure and social programs that could have stimulated local economies and kept people in their homes, where the majority of the people’s wealth is held, since the banks that would have foreclosed upon them would have been stuck in bankruptcy court.”
So to recapitulate, California cities are being bankrupted by Wall Street largely due to interest rate swaps which are tied to the LIBOR which we now know has been fraudulently manipulated by the big banks on Wall Street and in London. The result is austerity for the people of Oakland just as it has been for the people of Greece. LIBOR, the rate at which banks borrow from one another, is the basis for roughly $800 trillion worth of loans, financial instruments and derivatives including interest rate swaps. When banks manipulate LIBOR rates lower, they are borrowing money for less while their counterparties in interest rate swap contracts are stuck paying them much higher rates.
John Lawrence publishes his own blog, Will Blog for Food.
This article first appeared in San Diego Free Press.